Market Wrap Up
U.S. markets rallied on Friday, as European leaders agreed on new crisis fighting measures. The S&P 500 rose around 2.5 percent to approximately 1,362 and the Dow climbed to near 12,880. The tech heavy NASDAQ was the notable out-performer, climbing around 3.0 percent.
Markets opened higher on the European news and continued to climb on what appeared to be short covering. Oil gained more than 9 percent to close at $84.77 per barrel, trading consistently higher throughout the session. Brent crude rallied as well, gaining over 6.5 percent. Metals followed the move in the energy markets, with copper rallying more than 5 percent to close at $350.00 per pound. Gold and silver also rallied, with gold climbing over 3 percent to $1,600.50 per ounce and silver rallying to around $27.52 per ounce.
Overnight, European leaders agreed on a new set of crisis fighting measures, which was largely responsible for the risk-on sentiment in markets on Friday. The new measures included a new European banking authority within the European Central Bank. This authority is expected to be created by the end of the year. The leaders further agreed to remove the seniority of the European Stability Mechanism, paving the way for the bailout fund to buy bonds on the open market without subordinating existing bond holders. The leaders also agreed on direct bank recapitalizations through the bailout funds, which was a change from the original methods of bank recapitalizations. Countries previously had to take a loan from the Eurogroup, increasing sovereign debt levels, to help banks. Following the implementation of direct bank recapitalizations, these loans will likely be mutualized at the European level.
These new measures come following the announcement that the European Union will earmark an extra $150 billion for infrastructure spending. One-hundred-fifty-billion dollars amounts to slightly more than one percent of Eurozone GDP, so this spending is a sizable fiscal stimulus. Combined, all of these new measures mark a significant shift in policy making, from long-term goals to short-term, pro-growth policies. It has yet to be seen if the programs can be rolled out expediently, but, as Tom Keene of Bloomberg pointed out, this may be the first time that European leaders surprised the market.
Leaders hope to establish the banking authority within the ECB by the end of the year and look to implement the other proposals by July 9, less than two weeks from the announcement. This is a change for the leaders, who have previously been reluctant to act with speed in crisis fighting. For instance, the European Stability Mechanism was meant to be the grand solution but has taken over a year to approve and still has yet to be approved by all member nations. Only four of the seventeen nations have ratified the treaty change that accompanies this program. Thus, the newly found expediency may be applauded.
Friday, Spanish 10-year yields rallied an astounding 61 basis points 6.33 percent and Spanish 2-year bond yields also fell tremendously, closing down an unheard of 141 basis points to 4.273 percent. Italian bond yields fell in tandem, with the 10-year yield closing at 5.819 percent, down 37.6 basis points, and the 2-year yield falling to 3.5 percent, down 81 basis points.
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