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European stocks soar as bond yields fall; euro rockets

October 27, 2011 | 10:02 am

Merkelsummit
Europe’s financial rescue plan is having the effect the continent’s leaders hoped for.

Stocks have surged across Europe and government bond yields in the most troubled countries pulled back.

The euro currency rocketed to $1.420, up 2.1% for the day and the highest since Sept. 2.

Money also poured into U.S. stocks, lifting the Dow Jones industrial average more than 300 points.

"Investors around the world are cheering the fact that the Europeans have sucked it up and done what was necessary to mitigate a deeper crisis in the region," said Kathy Lien, director of currency research at GFT Forex.

A key element of the debt-crisis plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the size of the fund -- known as the European Financial Stability Facility -- to show that authorities are serious about dousing the debt crisis once and for all.

The EFSF would be leveraged to raise its firepower to $1.4 trillion. One expectation is that the fund would issue guarantees on bonds issued by deeply indebted countries, particularly Italy.

The goal: bring down interest rates on those bonds by making investors more confident about buying them.

The markets’ faith in the plan, at least for the moment, showed as yields on two-year Italian bonds fell to 4.43% from 4.56% on Wednesday.

Portuguese two-year bond yields slid to 17.81% from 19.06%; on Spanish two-year bonds the yield fell to 3.68% from 3.92%.

Stock prices rocketed in relief, led by bank issues. The Italian market jumped 5.5%, Spanish shares gained 5.0%, the French market soared 6.3% and even Greek stocks rose sharply, rallying 4.8%.

On Wall Street, the Dow Jones industrial average was up more than 300 points, or 2.5%, to 12,169 at about 10 a.m. PDT.

[Updated at the closing bell: The Dow gained 339 points, or 2.9%, to 12,208.55 for the day, its highest level since July 28. It's up 5.4% year to date.]

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-- Tom Petruno

Photo: German Chancellor Angela Merkel speaking after the Eurozone summit on Thursday. Credit: Geert Vanden Wijngaert / Associated Press

 

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