Draghi promise to save euro triggers market rally

AP News
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Posted: Jul 26, 2012 1:27 PM
Draghi promise to save euro triggers market rally

LONDON (AP) — Global markets rallied Thursday after the European Central Bank's chief, Mario Draghi, vowed to save the 17-country euro from the financial crisis, possibly by intervening in markets to help weaker states like Spain.

Markets have been rattled over the past few days by fears that Spain, the fourth-largest eurozone economy, could need a bailout along the lines of Greece, Ireland and Portugal because its borrowing rates are high. That would strain Europe's finances and potentially cause the break-up of the euro union.

Draghi pledged that would not happen: "The ECB is ready to do whatever it takes to preserve the euro," he told a conference of investors in London.

After insisting for months that it was up to governments to restore confidence in the eurozone, he suggested the ECB could now take action to lower the borrowing rates of financially weak countries like Spain and Italy.

He said that because those countries' high borrowing rates hinder the ECB's role in controlling inflation in the eurozone, it is within the bank's mandate to try to get those rates back down.

Market-watchers took the comments as an indication that the ECB is willing to once again intervene in markets to bring down government borrowing rates.

"They hint at a possible attempt to circumvent the restrictions on outright government bond purchases," said Ostwald.

Draghi's comments caused stocks, which had opened lower, to rally. Germany's DAX closed 2.8 percent higher at 6,582.96 while France's CAC 40 rose 4.1 percent to 3,207.12. Britain's FTSE rose 1.4 percent to 5,573.16.

The euro jumped 1.1 percent higher to $1.2285 and the borrowing rates for Spain and Italy fell sharply. The yield on Spain's 10-year bond fell about half a percentage point to 6.89 percent. Italy's equivalent yield dropped 0.29 percentage points to 6.07 percent.

Wall Street also rose, with the Dow industrial average gaining 1.5 percent and the S&P 500 1.4 percent.

Draghi's comments helped offset mostly gloomy news from corporate earnings earlier in the day.

Major companies like engineering group Siemens and carmaker Volkswagen warned that the economic slowdown in Europe would hurt profits in coming quarters. That hurt stocks in the industrial and automotive sectors.

Shares in Siemens and Volkswagen remained lower despite the broader market gains. Telecommunications maker Alcatel-Lucent suffered a 6.1 percent drop. Oil company Shell, which reported lower profits, saw its shares fall 2.3 percent.

Consumer goods maker Unilever was a bright spot, gaining 5.4 percent after reporting a strong rise in profits. But its improvement in business was due to growth outside of Europe, where sales in fact fell.

Earlier in Asia, indexes mostly rose, though gains were kept in check by more evidence of the toll that Europe's prolonged debt crisis is taking on the region. South Korea, Asia's fourth-largest economy, said economic growth slowed to a two-year low in the second quarter as weakness in Europe crimped demand from South Korea's biggest market China.

Japan's Nikkei 225 stock average climbed 0.9 percent to 8,443.10 and Hong Kong's Hang Seng added 0.1 percent to 18,892.79. South Korea's Kospi gained 0.7 percent to 1,782.47. Australia's benchmark rose 0.6 percent to 4,147.70 while the Shanghai Composite shed 0.4 percent to 2,126.

In energy trading, benchmark crude for September delivery was up 29 cents at $89.26 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 47 cents on Wednesday in New York to end at $88.97.