Markets jumped to post record gains on Friday after the European
Union summit reached a "breakthrough" deal promising to stabilize
the region's troubled banks and the lingering debt woes of the
region. Benchmarks recorded their best June performance in over a
decade, and S&P 500 and Nasdaq recorded their biggest gains
this year. Even though indices put up a robust performance on the
final day of the second quarter, they incurred losses for the
period as a whole. This was primarily due to European worries and
dismal economic readings.
The Dow Jones Industrial Average (DJI) jumped 2.2% and gained
277.83 points to close at 12,880.09. The Standard & Poor 500
(S&P 500) surged 2.5% and finished Friday's trading session at
1,362.16. The tech-laden Nasdaq Composite Index soared 3% to jump
to 2,935.05. The fear-gauge CBOE Volatility Index (VIX) slumped a
sharp 13.3% to settle at 17.08. Consolidated volumes on the New
York Stock Exchange, Nasdaq and American Stock Exchange were
roughly 7.69 billion shares, higher than the daily average of 6.85
billion. On a day of record gains, it was certain that the
advancers would run past the declining stocks; and for 85% stocks
that gained on NYSE, only 13% of the stocks moved lower.
Friday's session was dominated by positive developments from
across the Atlantic, a rare event which helped benchmarks gain
significantly. Investors were greeted by news that European leaders
had struck a deal that aims to stabilize troubled banks, eventually
easing the region's lingering debt issues. In a major
"breakthrough", the European leaders allowed the permanent bailout
fund, namely the European Financial Stability Fund and the European
Stability Mechanism, to directly infuse money into the banks. This
is a major step forward, as these funds would be utilized to
directly purchase government bonds of Euro nations and that would
not call for painful austerity measures. Greece, Portugal and
Ireland had earlier faced the ordeal of adhering to strict economic
norms in order to secure respective bailout funds.
Further, the deal will allow nations to recapitalize their banks
without adding to their budget deficit. The leaders also agreed
that a single supervising institution would be set up that would
oversee the banks across the Euro-zone.
Incidentally, the terms of the agreement show that Euro-zone
bellwether Germany had to give in to the demands, which the nation
had so far resisted. Reports suggested that Italian Prime Minister
Mario Monti played a key role in getting all the member nations to
agree to the deal and save Italy and Spain in particular. Earlier
Spain had to seek bailout worth $125 billion, and the eventual
increase in debt burden had severely dented the markets. Thus, the
deal had become a necessity and Monti reportedly urged leaders to
stay back in Brussels until they agreed to these measures. An
official said: "The south is now more assertive" and Mario Monti
was well supported by Spain's Prime Minister Mariano Rajoy. German
Chancellor Angela Merkel, who had so far laid down conditions for
the use of the permanent funds, ultimately had to give in to these
demands. However, she did manage to get the others to agree to the
condition that a common Euro-zone wide bank supervising institution
should be set up.
The details of the deal remained sketchy. However, the major
highlights were enough to boost investor sentiment, as historical
trends had meant they were expecting little from the summit. Thus,
the deal was all the more significant and led the benchmarks to
close the otherwise dull second quarter with a bang. The S&P
500 and Nasdaq posted their best one-day performance this year on
Friday. Nonetheless, quarter-long concerns about Euro-zone debt and
dismal global economic readings kept the benchmarks back in the red
for the entire period. The Dow, S&P 500 and Nasdaq lost 2.5%,
3.3% and 5.1%, respectively during the second quarter.
Friday's gains might have failed to avert quarterly losses, but
the benchmarks notched up the best performance for the month of
June in over a decade. The Dow jumped 3.9% in June to record its
best June performance since 1997, the S&P 500 recorded its best
performance for this month since 1999, gaining 4.0%. Posting an
increase of 3.8%, the Nasdaq enjoyed its best June since 2000.
Benchmarks also ended the week on a winning note, with the Dow,
S&P 500 and Nasdaq clinching gains of 1.9%, 2.0% and 1.5%,
respectively.
The European deal was certain to lead the financial sector
higher and the Financial Select Sector SPDR (XLF) ended 2.5% higher
while KBW Bank Index (BKX) jumped 2.7%. Among financial stocks,
Bank of America Corp (NYSE:
BAC
), American Express Company (NYSE:
AXP
), Citigroup Inc. (NYSE:
C
), Goldman Sachs Group, Inc. (NYSE:
GS
), Morgan Stanley (NYSE:
MS
), UBS AG (USA) (NYSE:
UBS
) and Wells Fargo & Company (NYSE:
WFC
) increased by 5.7%, 2.7%, 3.9%, 2.5%, 5.2%, 4.2% and 3.0%,
respectively.
The European deal was the predominant factor and domestic
economic readings hardly had any impact on the day's trading
session. The Reuters/Michigan Consumer Sentiment was reported to
have dropped to 73.2 in June, down from 79.3 in May and was short
of consensus expectations of 74.3. Separately, the Chicago Purchase
Managers Index edged up to 52.9% in June, up from 52.7% in May and
was also ahead of consensus estimates of 52.6%.
AMER EXPRESS CO (AXP): Free Stock Analysis
Report
BANK OF AMER CP (BAC): Free Stock Analysis
Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
Report
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