TODAY'S MARKETS
JULY 21, 2011, 6:40 P.M. ET
Progress On Debt Rubs Off On StocksBy TOM LAURICELLA
Signs of progress in dealing with debt woes on both sides of the Atlantic Thursday propelled U.S. stocks, European bonds and the euro sharply higher in volatile trading.
In the U.S., the good news came in the form of hints that talks between the White House and congressional Republicans are moving closer to a deal that would raise the federal debt ceiling and slice the U.S. government's deficit.
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In Europe, officials agreed to a plan designed to reduce Greece's debt burden and, more important for most investors, limit the potential for contagion that could send Italy and Spain into crisis.
The Dow Jones Industrial Average posted its second straight day of triple-digit gains, rising 152.50 points, or 1.2%, to 12724.41. The blue-chip index is now less than 100 points shy of its 2011 high of 12810.54 reached in late April. In Europe, Spanish and Italian stock markets were the big winners, gaining 2.9% and 3.8%, respectively, recovering ground lost in recent weeks.
The euro went for a roller-coaster ride on its way higher, as traders were once again whipsawed by comments from European officials. During European trading hours, it fell to around $1.4150 from more than $1.42 on news suggesting a meeting of European leaders wouldn't result in a comprehensive plan aimed at thwarting contagion. But then traders were spun around as news of a deal trickled out. The euro was up 1.5% against the U.S. dollar at $1.4424 in late New York trade.
The hope among investors is that the day's events bring the financial markets another step closer to resolving the major risks that have been bedeviling investors. In recent weeks, fears have been growing that the political bickering over the U.S. debt ceiling could lead ratings firms to take away the U.S. government's AAA rating. At the same time, Italy and Spain were once again being dragged down by worries that a default by Greece would ricochet through financial markets.
Blue-chip stocks surged as hopes for a major budget deal in Washington and efforts to contain Europe's sovereign-debt crisis whetted investors' risk appetite. Steven Russolillo has details. Plus, earnings from Microsoft.
Still, the deal also brings Greece closer to default, the prospects of which could keep investors unsettled. At the same time, the U.S. is still far from resolving its own debt problems.
Given the potential risks from a U.S. downgrade or a disorderly default by Greece, many hedge funds have been stockpiling cash. Those that have been trading have been chewed up by sharp back-and-forth price swings as markets respond to the latest comments from U.S. or European politicians.
"Everyone says the resolution of the debt crisis is good for the euro and the resolution of the debt ceiling is good for the dollar, but it's not so much that it's good or bad but that it adds certainty, and therefore trends, back into the market," says Jon Stein, managing director at Parker Global Strategies.In the currency markets, daily big swings in the euro against the dollar have made for a challenging environment for many hedge-fund managers. The bias among many so-called macro funds, which invest based on big economic themes, has been to bet that the crisis will lead to a lower euro. While the euro has fallen against some currencies, especially the Swiss franc, it has gained against the U.S. dollar.
That volatility has extended to stocks, where the Dow has been swinging in a wide range since February. Making things especially difficult for stock pickers is that many individual stocks have been moving in lock-step.
"It's been a ping-pong market, and you really haven't been rewarded for individual stock-picking during the first half of the year," said Jonathon Trugman, who runs New York-based equities hedge fund Pendulum Capital Management. To make money, "you've had to play the big macro moves. Now we can shift back to being more stock-specific."
The news out of the European summit helped Italian and Spanish bonds extend a rally that began Tuesday. The yield on Spanish 10-year debt fell to 5.7% Thursday from 5.9% Wednesday, having topped 6.2% Monday, according to Tradeweb. The yield on Italian 10-year bonds fell to 5.3% from 5.6%.
Analysts said the summit appeared to address many concerns. And while it offers some breathing room, it likely doesn't mean the end of the crisis.
"They have said all that the markets could have hoped them to say, and it is creating some relief in terms of the immediate concerns," said Robert Sinche, currency strategist art RBS Global Banking & Markets.
He said the focus will shift to Greece's ability to implement reforms, with key deadlines in September and December.
