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Friday 21:15 BST. Stocks ended the week with a strong rebound from the previous session’s sharp losses and Spanish short-term borrowing costs plunged as traders reassessed the impact of central bank inaction this week and were cheered by a stronger-than-expected US jobs report.
The FTSE All-World stock index rose 1.9 per cent, held back only a bit by a 0.7 per cent drop for the Asia-Pacific region.
The FTSE Eurofirst 300 surged 2.5 per cent, despite news of soft service sector activity in the eurozone and the UK, while Wall Street’s S&P 500 climbed 1.9 per cent higher for its first positive close of the week.
Bigger gains registered elsewhere – Italian stocks up 6.3 per cent and Spanish stocks up 6 per cent.
Standard & Poor’s weighed in late on Friday in New York, with rating actions on 32 Italian financial institutions as their vulnerability to credit risk in the economy rises.
Other growth-sensitive products such as commodities, firmed, with copper adding 2.2 per cent to $3.36 a pound and Brent crude rising $3.02 to $108.93 a barrel.
The dollar index, which tends to retreat when the broader market mood improves, was off 1.2 per cent, and perceived “havens” lost some cachet, with the US 10-year Treasury yield rising 10 basis points to 1.58 per cent and Bunds up 18bp to 1.40 per cent.
This optimistic trend needs to be put in the context of what occurred in the previous session.
Risk appetite was battered in Europe and the US on Thursday – equities slid, haven yields plunged, “peripheral” borrowing costs soared and commodities and the euro slumped – after the European Central Bank disappointed investors with no immediate action to address the eurozone’s debt crisis.
Investors believe it is crucial that the eurozone authorities show they can deliver a programme that halts the rising tensions in the bloc’s debt markets in the long term as fears of more national bailouts build.
Such concerns have been sapping sentiment worldwide and contributing to the current global economic soft patch. But traders thought they did not get what they hoped for.
On Friday it was Asia’s turn to react. The lack of ECB action weighed particularly on exporters. Japanese technology shares were hit hard as the yen gained against major currencies and Sharp and Sony cut their earnings forecasts.
The Nikkei 225 in Tokyo shed 1.1 per cent, the same as Sydney’s S&P/ASX 200, where miners were pressured by a drop in commodity prices overnight.
But European and US traders were confident on Friday as they made a more sober assessment of what Mr Draghi said at his press conference the day before.
In particular, analysts focused on the ECB president’s statement that he “may consider” again buying short-term government debt – though he would expect strict conditions to be attached to such purchases.
This helped two-year borrowing costs for Spain and Italy to plunge, down 87 basis points to 3.96 per cent and 61bp to 3.13 per cent, respectively.
Because the market is most concerned about Madrid and Rome’s shorter-term borrowing costs – it better reflects their imminent ability to access funding – such yield contractions helped to spark a broad improvement in mood.
The euro was helped by the falling short-term yields and easing tensions, rising 1.6 per cent to $1.2377.
The ECB’s inaction came just a day after the Federal Reserve also disappointed some market participants.
The US central bank decided to stay its hand in response to meek growth, preferring to emphasise it stood ready to act should it be deemed necessary to support the economy.
An important clue as to whether the Fed may indeed need to provide additional stimulus came on Friday when the monthly non-farm payrolls numbers were released.
Analysts had forecast a net 100,000 jobs created in July and for the unemployment to remain at 8.2 per cent, according to Reuters news agency.
However, 163,000 jobs were added, the best tally in five months. This added further impetus to the eurozone-fuelled risk asset rally as it marginally reduced fears about the health of the world’s biggest economy.
However, the US unemployment rate edged up to 8.3 per cent and the gains for May and June were revised down by an aggregate 6,000.
While the tick-up in joblessness and the revisions took some of the shine off traders’ optimism, it also allowed those eager to see more Fed action to claim the labour market remained sufficiently weak to allow for more central bank largesse.
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