NEW YORK |
(Reuters) - The euro jumped nearly 2 percent, oil prices surged and world stocks rallied on Friday after euro zone leaders agreed on measures to cut soaring borrowing costs in Italy and Spain, in addition to directly recapitalizing regional banks.
Spanish and Italian government bond yields fell sharply, while safe-haven U.S. and German government debt sold off after the region's leaders agreed that European Union bailout funds could be used to stabilize bond markets to support countries that comply with EU policy recommendations.
EU leaders also agreed after 14 hours of intense talks that creation of a single supervisory body for euro zone banks, housed under the European Central Bank, would be discussed by year-end - a first step toward a banking union in the euro zone.
Markets rallied on the news, which caught investors by surprise, as expectations for meaningful steps to tackle the debilitating debt crisis had all but disappeared in the run-up to the two-day EU summit.
"We've gotten used to being underwhelmed by the outcomes, so with little to no expectations for success, the fact that it appears we are going to get something substantial is a real important positive for the market in the near term," said Art Hogan, managing director of Lazard Capital Markets in New York.
"It's inching closer to a banking union and the closer we get to a banking union would put (the EU) well on the road to a fiscal union."
The euro surged against the U.S. dollar, climbing as high as $1.2692 (0.808 pence) on Reuters data, the strongest since June 21. It was last at $1.2657.
Stocks on Wall Street rose almost 2 percent, following a jump in Europe that pushed indexes up more than 2 percent, spurred by soaring bank shares.
The Dow Jones industrial average was up 232.72 points, or 1.85 percent, at 12,834.98. The Standard & Poor's 500 Index was up 27.43 points, or 2.06 percent, at 1,356.47. The NasdaqComposite Index was up 74.85 points, or 2.63 percent, at 2,924.34.
In Europe, the FTSE Eurofirst 300 index closed 2.6 percent higher, with banks up 4.1 percent. MSCI's all-country world equity index gained 2.7 percent and its emerging markets index climbed 3.4 percent.
The price of safe-haven German bonds headed lower - briefly pushing yields above their U.S. equivalents for the first time since early February - while prices for gold, oil and copper all rose.
Yields on 10-year German debt rose as high as 1.691 percent, before paring gains to 1.584 percent. Their U.S. counterpart, the benchmark 10-year U.S. Treasury note, was down 22/32 in price to yield 1.6569 percent.
Yields on Italian 10-year debt fell to 5.832 percent from 6.192 percent the previous night, while yields on the Spanish equivalent fell to 6.346 percent, down from the close of 6.915 percent on Thursday.
"EU support for Spain and Italy looks more real today than it has any time the last three years," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York. "This is not a 'buy some time' fix. It's big."
Despite the market euphoria, some remained sceptical.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ in London said among lingering questions is whether the firepower available to the rescue funds will be enough to stabilize the 2.5 trillion euro Spanish and Italian bond markets, and how easy it will be to agree on the banking supervisory mechanism.
"Our initial view is this deal is no game-changer."
Andrew Milligan, head of global strategy at Standard Life Investments, said that bond yields in many European countries are still too high and growth rates too low.
"We really didn't see any actions by the authorities last night which are going to have a material impact on either of those," Milligan said.
Oil prices rallied, but were still set for the deepest quarterly loss since 2008.
Brent crude for August was up $5.68 to $97.04 a barrel. U.S. crude was up $6.24 a barrel at $83.93 a barrel, up from an eight-month low hit on Thursday.
Copper rose more than 4 percent to hit a 1-month high, while gold prices rallied almost 3 percent.
Spot gold prices rose $48.47 to $1,599.70 an ounce. The Reuters/Jefferies CRB Index, a benchmark of 19 commodities, was up 4.1 percent at 282.81