U.S. Indexes Surge on the Euro-zone Banks Recap Talks

Bikram Pandey
10 Oct, 2011
New York City

U.S. indexes soared and banks surged 6% after European leaders offered more promises. Market sentiment may dent if politicians fail to deliver on their promises. Banks in Europe were in focus after the largest bank was nationalized. Slovakia vote on the rescue fund may offer a surprise.

[R]5:25 PM New York – U.S. indexes soared and banks surged more than 6% after European leaders offered more promises to facilitate bank recapitalization. Market sentiment may dent if politicians fail to deliver on their promises. Banks in Europe were in focus after the largest bank was nationalized. Slovakia vote on the rescue fund may offer a surprise.[/R]

Stocks in early trading in New York surged more than 3% after France and Germany reiterated their support to recapitalize banks. Market optimism was palpable in the early trading after financials and commodities linked stocks soared.

Banks, materials and transportations stocks led the rally and Complete Production Services soared 34% after it agreed to $2.6 billion bid from Superior Energy that offered 29% premium.

Bank of America, Citigroup, Morgan Stanley and Wells Fargo soared more than 6%. JP Morgan Chase surged 5% and Goldman Sachs added 3%.

The talks of infusing capital into European banks lifted investors’ sentiment but European leaders are expected to extract more conditions from bank unlike the bailout arranged by Republican President George W. Bush and Secretary of State Henry Paulson.

Republican Party led U.S. banks bailout in 2008 offered nearly $700 billion with no conditions and after three years most retail customers are stuck with higher fees that support exorbitant bank executive pay and bonuses.

The International Monetary Fund had previously estimated that the euro zone banks may need as much as €300 billion. However, Greek bonds have dropped 30% in the last two months and the yield on Italian and Spanish bonds have rocketed 100 basis points higher.

The research team of 123jump.com estimates that the current bank bailout may need as much as €1.1 trillion.

European markets were led by the 3% advance in Germany and Sweden and other major markets in the region increased between 1% and 3% on the hopes that Germany and France will follow through the promises to facilitate bank recapitalization plan.

Slovakia is set to vote on the expansion of the European rescue fund this week but the ruling party holds a slim majority and politicians are loath to offer any bailout to Greece. Slovakian politicians have mounted national campaign against the approval and the outlook for the vote is delicate tomorrow.

Banks were in focus in European trading after Austria based and Eastern Europe focused Erste Bank announced €800 million losses linked to the Hungarian loans and declines in peripheral euro zone sovereign bonds.

Belgian bank KBC agreed to sell its private bank KBL for €1.05 billion to a financial service company Precision Capital based in Luxembourg controlled by a Qatar based investor. KBC private bank last year had agreed to be acquired by Indian family controlled Hinduja Group for €1.35 billion but the deal fell through for the regulatory reasons.

Dexia SA, the largest Belgian bank agreed to a nationalization plan that will divide it up in units controlled by the governments of France, Belgium and Luxembourg and will receive in exchange €90 billion of loan guarantees.

In Asian markets, Japan was closed and the Sensex index in India soared 2%.

Australian stocks advanced for the fourth day in a row and resource stocks and banks led the gainers. Mining giant BHP Billiton won governments approval to expand its open cut mining operation, Olympic Dam that may bring investment between $20 billion and $30 billion.

Qantas was forced to cancel 40 flights as engineers union delayed the strike to Friday and threatened more work stoppages around holiday time.

Commodities, Bonds and Currencies

The U.S. bond markets were closed today and in Friday’s trading, the yield on 10-year U.S. bond closed up to 2.08% and 30-year bond increased to 3.02%.

The U.S. dollar decreased to $1.364 to one euro and closed lower against the Japanese yen to 76.65 yen.

Immediate delivery futures of Texas crude oil increased $2.34 to $85.33 a barrel and futures of natural gas increased 0.07 cents to $3.55 per mbtu and gasoline price increased 5.08 cents to 270.11 cents a gallon.

In metals trading, copper increased 9.25 cents to $3.36 per pound, gold increased $38.60 to $1,674.40 per ounce and silver increased $0.92 to $31.91.