The European Central Bank bond-buying plan, an upbeat U.S.
employment report and a positive surprise in the services sector
sent exchange traded funds sharply higher around the world
In afternoon trade,
SPDR S&P 500
) rallied 1.93% to 143.63 -- its highest level since May
PowerShares QQQ (
), tracking the 100 largest nonfinancial stocks on the Nasdaq,
surged 2.04% to 69.41 -- a 12-year peak.
SPDR Dow Jones Industrial Average (
) climbed 1.77% to 132.68 -- just a hair below its 52-week
IShares MSCI EAFE Index (
), tracking developed foreign markets, jumped 2.46% off its
200-day moving average. It landed just below a 53.02 buy point in
a bullish cup-with-handle chart pattern.
IShares MSCI Emerging Markets Index (
) gapped up 2.21%. But it's still trading below its 200-day
average. Its 50-day average has crossed below its 200-day line,
which is bearish.
"Nothing that happened this morning was really a surprise,"
said Paul Schatz, president of Heritage Capital in Woodbridge,
Conn. "The stock market has been behaving like a coiled snake and
today, it struck."
He believes the market has been expecting ECB President Mario
Draghi and Federal Reserve Chairman Ben Bernanke to unleash
mountains of stimulus.
"The longer this goes on and more 'air' we get under stocks,
the bigger the potential disappointment," he said. "But for the
short term, it's all systems go."
At a press conference in Frankfurt, Germany, ECB President
Mario Draghi announced the ECB would buy unlimited amounts of
government bonds of indebted countries in an effort to solve the
European debt crisis. The ECB would buy short-dated debts with
maturities of one to three years to cut borrowing costs for
Spain, Italy and others.
Under the plan, dubbed Outright Monetary Transactions (OMTs),
countries seeking ECB help must first seek emergency aid from
bailout funds of the 17-country European Union and be monitored
by the International Monetary Fund. The bond purchases would be
"sterilized," meaning they will be done under a complicated
scheme that will not increase the money supply. The ECB would
publish the size of the purchases on a weekly basis.
"In the short run, we may save Italy and Spain," said John
Alan James, professor at Pace University's Lubin School of
Business in New York. "But like the Fed printing money and
loaning the cash to a federal government up to its neck for $16
trillion, when will the creditors take note and stop buying the
Many questions remain unanswered, notes David Owen, chief
European financial economist at Jefferies. How will the plan
affect inflation? How will it be accepted by Germany, the
Netherlands and the Nordic EU members? How will Europe's economy
grow out of a recession to pay off its debts? How is the OMT
different from the Securities Market Program through which the
ECB bought $263 billion in bonds?
"Lost in the events of the day is that the ECB (in its latest
quarterly staff projections) revised down the level of euro area
gross domestic product at the end of 2013 by almost a full 1%,"
Owen wrote in a note. "The euro area clearly faces a
deteriorating macroeconomic environment, but the ECB stubbornly
continues to ignore the elephant in the room."
Critics say the ECB's plan achieves nothing and raises false
"The only solution is a massive debt restructure in Europe and
until that is discussed, the aftermath of this crisis will be
severe," says Jeffrey Sica, president and chief investment
officer of Sica Wealth Management in Morristown, N.J.
U.S. Economy On Growth Path
The market also cheered economic data releases that showed the
U.S. economy is on a modest but positive growth path. Economic
activity in the nonmanufacturing business sectors grew in August
for the 32nd month straight, according to a survey by the
Institute for Supply
. The nonmanufacturing ISM index registered at 53.7 in August, up
1.1 from a 52.6 reading in July and well above consensus
expectations of 52.5. Readings above 50 show expansion. Service
companies employ about 90% of the workforce and include
everything from retail to health care to financial services.
The August reading suggests U.S gross domestic product is on
trend to expand at an annualized rate of just more than 2%, says
Jim O'Sullivan, chief U.S. economist at High Frequency
Jobless claims fell by 12,000 last week to 365,000 -- better
than expectations of 370,000. HFE noted that the drop in claims
could have been because of Hurricane Isaac as people affected by
the storm were too preoccupied to file for unemployment. Payroll
provider ADP reported businesses added 201,000 jobs last month --
the most since March.
Follow Trang Ho on Twitter @TrangHoETFs