Move by central banks exhilarates Wall Street

DANIEL WAGNER

AP Busi­ness Writer

A move by the world’s cen­tral banks to lower the cost of bor­row­ing exhil­a­rated investors Wednes­day, send­ing the Dow Jones indus­trial aver­age soar­ing 490 points and eas­ing fears of a global credit cri­sis sim­i­lar to the one that fol­lowed the 2008 col­lapse of Lehman Brothers.

It was the Dow’s biggest gain since March 2009 and the seventh-largest of all time.

Large U.S. banks were among the top per­form­ers, jump­ing as much as 11 per­cent. Mar­kets in Europe surged, too, with Germany’s DAX index climb­ing 5 percent.

“The cen­tral banks of the world have resolved that there will not be a liq­uid­ity short­age,” said David Kotok, chair­man and chief invest­ment offi­cer of Cum­ber­land Advi­sors. “And they have learned their lessons from 2008. They don’t want to take small steps and do any­thing incre­men­tally, but make a big bold move that is credible.”

Wednesday’s action by the banks of Europe, the U.S., Britain, Canada, Japan and Switzer­land rep­re­sented an extra­or­di­nary coor­di­nated effort.

But amid the market’s excite­ment, many doubts loomed. Some ana­lysts cau­tioned that the banks did noth­ing to pro­vide a per­ma­nent fix to the prob­lems fac­ing heav­ily indebted Euro­pean nations such as Italy and Greece. It only buys time for polit­i­cal leaders.

“It is a short-term solu­tion,” said Jack Ablin, chief invest­ment offi­cer at Har­ris Pri­vate Bank. “The bot­tom line on any cen­tral bank action is that it papers over the prob­lems, buys time and in some respects takes pres­sure from politi­cians. … If nothing’s done in a week, this mar­ket gain will disappear.”

Banks stocks soared as fears about an immi­nent dis­as­ter in the Euro­pean finan­cial sys­tem ebbed.

Amer­i­can and Euro­pean banks are con­nected by con­tracts, loans and other finan­cial entan­gle­ments, mean­ing that a Euro­pean finan­cial cri­sis would pun­ish U.S. bank stocks. The brighter out­look that emerged Wednes­day relieved some investor concerns.

JPMor­gan Chase & Co. jumped 8.4 per­cent, the most of the 30 Dow com­po­nents. Mor­gan Stan­ley rose 11.1 per­cent and Cit­i­group Inc. 8.9 percent.

Wor­ries about the finan­cial sys­tem — and the reluc­tance of the Euro­pean Cen­tral Bank to inter­vene — have caused bor­row­ing rates for Euro­pean nations to sky­rocket. Wednesday’s deci­sion reduced the rates banks pay to bor­row dol­lars — a move that aims to make loans cheaper so that banks can con­tinue to oper­ate smoothly.

Euro­pean banks rely on dol­lars to cover loans they have promised to con­sumers and busi­nesses and pay for invest­ments in U.S credit mar­kets. They tra­di­tion­ally have tapped short-term fund­ing from U.S money mar­ket mutual funds and other banks. But money mar­ket funds have been pulling dol­lars from Europe in recent months, and lend­ing between banks has dried up.

In response to the new rates, the euro rose sharply, while U.S. Trea­sury prices fell as demand weak­ened for ultra-safe assets.

The Dow rose 4.2 per­cent to close at 12,045. It has more than gained back the 564-point slump it had last week. It is up 813 points, or 7.3 per­cent, so far this week. The last time the Dow closed up more than 400 points was Aug. 11.

The Stan­dard & Poor’s 500 closed up 52, or 4.3 per­cent, at 1,247. The Nas­daq com­pos­ite index closed up 105, or 4.2 per­cent, at 2,620.

Seven stocks rose on the New York Stock Exchange for every one that fell. Vol­ume was heavy at 5.7 bil­lion shares.

Surg­ing com­mod­ity prices lifted the stocks of com­pa­nies that make basic mate­ri­als such as steel. United States Steel Corp. gained 15.3 per­cent, the most in the S&P 500. AK Steel Hold­ing Corp. added 13.4 per­cent. Energy stocks also leaped. Alpha Nat­ural Resources Inc. rose 15.2 per­cent, Peabody Energy Corp. 14.3 percent.

The act by the cen­tral banks took some pres­sure off the finan­cial sys­tem, which has sig­naled in recent days that many banks were los­ing faith in their trad­ing part­ners. And it offered hope that more help was on the way.

“Peo­ple are tak­ing com­fort that it’s glob­ally coor­di­nated,” said Peter Tchir, who runs the hedge fund TF Mar­ket Advisors.

The move would have a lim­ited effect, he said, “but the bulls are antic­i­pat­ing that this is just the begin­ning of cen­tral bank and other actions” to ease mar­ket pressures.

Any suc­cess­ful plan would have to reduce bor­row­ing costs for Italy and other indebted nations, Tchir said. Italy’s bor­row­ing costs edged lower Wednes­day, but the nation was still pay­ing more than 7 per­cent inter­est for 10-year bor­row­ing — a dan­ger­ously high level.

Euro­pean finance min­is­ters in Brus­sels have been meet­ing since Tues­day but have failed to deliver a clearer sense of how the cur­rency union will pro­ceed. More lead­ers gather next week on Fri­day for a summit.

In another attempt to free up cash for lend­ing, China on Wednes­day reduced the amount of money its banks are required to hold in reserve. It was the first eas­ing of mon­e­tary pol­icy in three years, and ana­lysts are expect­ing more.

Growth in China, which has the largest econ­omy after the Euro­pean Union and the U.S., could be cru­cial to sus­tain­ing any recov­ery after the debt crisis.

A string of pos­i­tive U.S. eco­nomic news also pro­pelled the mar­ket higher. An index mea­sur­ing man­u­fac­tur­ing in the Mid­west surged to a seven-month high; pri­vate com­pany hir­ing jumped in Novem­ber to the high­est level this year, accord­ing to pay­roll com­pany ADP; and the num­ber of con­tracts to buy homes jumped in Octo­ber to the high­est level in a year.

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