US stocks finished the first half of the year with a bang as investors welcomed news that the Eurozone is a step closer to solving its 30-month-long debt crisis. Now for the question: Is this rally strong enough to last for more than a day?
The S&P 500 and the Nasdaq posted their best daily percentage gains since December on Friday after an agreement by European leaders to stabilize the region’s troubled banks, a pact that helped remove some of the uncertainty that has plagued markets.
“That is the major question. Can this fuel a longer-term rally? It can, but only to some degree if, over the weekend and the course of next week, we don't see any major push back or headlines that suggest that this deal is not going to happen,” said Quincy Krosby, a market strategist at Prudential Financial.
“But I don’t think this is a major game changer. I do, however, think that this is really the first time we got a relatively immediate answer to what they (the Euro-zone leaders) are going to do about the issue.”
Under pressure to prevent a catastrophic breakup of their single currency, Eurozone leaders agreed on Friday to let their rescue fund inject aid directly into stricken banks starting next year and intervene in bond markets to support troubled member-states. They also pledged to create a single banking supervisor for Eurozone banks based around the European Central Bank in a landmark first step toward a European banking union that could help shore up struggling member Spain.
Wall Street’s previous reaction to euro-zone bailout packages or other rescue plans had been somewhat muted. Initial gains would quickly disappear by the day’s end as investors realized that there isn’t a quick fix to the region’s problems.
On Friday, it was a different story. The three major US stock indexes jumped 1.5 per cent to two per cent shortly after the opening bell on news of the Eurozone agreement. By the close, stocks ended at session highs with the major indexes up between two per cent and three per cent. The Dow Jones industrial average surged 277.83 points, or 2.20 per cent, to end at 12,880.09. The Standard & Poor’s 500 Index jumped 33.12 points, or 2.49 per cent, to finish at 1,362.16. And the Nasdaq Composite Index shot up 85.56 points, or 3.00 per cent, to close at 2,935.05.
For the week, the Dow rose 1.9 per cent, the S&P 500 advanced two per cent and the Nasdaq gained 1.5 per cent. For the month, the Dow added 3.9 per cent, the S&P 500 rose four per cent and the Nasdaq climbed 3.8 per cent. But for the second quarter, the Dow dropped 2.5 per cent, the S&P 500 slid 3.3 per cent and the Nasdaq lost 5.1 per cent.
Despite the weak second quarter, the three major US stock indexes wrapped up the first half of the year with decent gains: The Dow was up 5.4 per cent, the S&P 500 was up 8.3 per cent and the Nasdaq was up 12.7 per cent.
Any market reaction to further developments this week could be exaggerated by lighter-than-usual volume. Wall Street trading desks may be more sparsely populated because it will be a short week. The US stock market will be closed on Wednesday, the Fourth of July, in observance of Independence Day.
The market’s focus will shift to the ECB this week as investors wait to see whether it cuts interest rates to complement the measures taken by EU leaders to shore up banks and bring down borrowing costs for Spain and Italy. Most economists expect the ECB to cut borrowing costs on 5 July, at its meeting, which takes place against a darkening economic backdrop.
This week’s data includes the Institute for Supply Management’s US manufacturing index and construction spending today, followed by factory orders and June car sales tomorrow. After Wednesday’s holiday, investors will face a blitz of economic indicators. On Thursday, weekly jobless claims and mortgage data, ADP’s private-sector payrolls report and the ISM’s US services-sector index will be released.
On Friday, the government’s June nonfarm payrolls report will come out. Economists have forecast a gain of 90,000 jobs, with the US unemployment rate holding steady at 8.2 per cent.