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Sweetest words of all great for stocks

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by Peter Switzer

They were the sweetest words of all and they were uttered by the European Central Bank’s (ECB) boss, Mario Draghi, and they sent the Dow up 1.67 per cent or 211.88 points to see the important barometer of stock market positivity to 12,887.93!

So what were those words? Well, I have been arguing we’ve needed to hear them and see the actions to match them for over two years and we heard them last night. They were short and sweet and they went like this: “Whatever it takes!”

Draghi has promised to take the actions to keep the euro alive and happening and that means helping to bring down the cost of borrowing for the likes of Spain and Italy.

It’s a shot across the bows of the hedge funds and bond vigilantes who have been betting that bond yields would go higher because the ECB was unwilling to take the kinds of actions the Federal Reserve took in the USA, that is, expand the money supply and buy bonds.

When a central bank buys bonds big time, it increases bond prices and this drives down the yields or effective interest rate — this is what Spain and Italy need.

Stocks gain

These words created the rally with the S&P 500 index up 22.13 points or 1.65 per cent to finish at 1360.02. But of course, words are cheap; the market will expect to see actions and skepticism will re-emerge if no real changes result.

The French liked what they heard with the CAC 40 up 4.07 per cent and even the Germans smiled a bit with the DAX up 2.75 per cent.

There’s now an expectation that the Fed will move to QE3, which would give the market a real double bunger and that could come next week. Against that, Ben Bernanke could wait another month, though that could leave him open to accusations that he’s helping Barack Obama’s re-election plans.

Possibly tomorrow’s GDP number in the States could seal the fate of QE3 where a low result could be the catalyst for a move by the Fed.

Earnings and data

Interestingly the Yanks got two good pieces of economic data with jobless claims falling more than expected and durable goods rising more than expected.

On earnings 65 per cent of companies that have reported have beaten expectations while 22 per cent disappointed, but it still is a pretty good picture of company health in the USA, considering the economic headwinds out there at the moment.

It explains why there has not been a big market selloff for some time.

As always the ball is back in the Europeans court — let’s hope they can hit a winner and pick up an ‘Olympic medal’ for enlightened economic policy.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, July 27, 2012

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