Investors cheered a commitment by German Chancellor Angela Merkel and French President Nicolas Sarkozy to secure a concrete plan for the rescue of the European Union’s banks suffering from the region’s fiscal troubles.
“By the end of the month, we will have responded to the crisis issue and to the vision issue,” Sarkozy said in Berlin yesterday at a joint briefing with Merkel. Sarkozy said they will deliver a plan by the November 3 Group of 20 summit.
Merkel and Sarkozy gave themselves three weeks to create a plan to recapitalise banks.
Investors on both sides of the Atlantic decided to respond with optimism.
The Stoxx 600 Index closed the day with a 1.7% gain. In afternoon trading in New York, the Dow Jones Industrial Average climbed 2.39%, the Standard & Poor's 500 Index gained 2.84% and the Nasdaq Composite Index rallied 3.02%.
"The market gave Merkel and Sarkozy the benefit of the doubt. They know they have to come up with specifics," Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey, told Reuters.
Underpinning the political determination to finally get ahead of the region’s problems that have hammered financial markets and the euro was the decision to nationalise part of Dexia SA.
The Franco-Belgian bank, harmed by its financial exposure to Greece, agreed to the nationalisation of its Belgian retail bank and secured 90 billion euros (US$121 billion) in state guarantees.
Krosby said the Dexia rescue showed European governments "can act quickly and decisively," underpinning hopes for real action ahead.
The optimism boosted Europe’s battered currency. The euro strengthened 2.3% to US$1.3689 in midday trading in New York. It gained 2.3% to 104.97 yen.
The greenback dropped 1.53% against a basket of major currencies.
“There’s a sense now that we’re marching toward some attempt at a broader plan to support the euro area,” Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York, told Bloomberg News.
Things are looking up for the U.S. too. A slew of better-than-expected data has prompted economists at Goldman Sachs Group Inc. and Macroeconomic Advisers LLC to lift their growth forecasts for third quarter growth to 2.5% from about 2%. That’s nearly double the second quarter’s 1.3% rate and would be the fastest growth in a year.
“The U.S. economy doesn’t look like it’s double-dipping at all,” Allen Sinai, president of Decision Economics Inc. in New York, told Bloomberg News. “But it is a crummy recovery.”