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Move to ease cost of borrowing exhilarates Wall Street, sends Dow soaring 400 points
A move by the world's central banks to lower the cost of borrowing exhilarated investors Wednesday, sending Wall Street soaring 400 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.
Big U.S. banks were among the top gainers, jumping as much as 7 percent. Markets in Europe surged, too, with Germany's DAX index climbing 5 percent. The last time the Dow closed up more than 400 points was Aug. 11.
"The central banks of the world have resolved that there will not be a liquidity shortage," said David Kotok, chairman and chief investment officer of Cumberland Advisors. "And they have learned their lessons from 2008. They don't want to take small steps and do anything incrementally, but make a big bold move that is credible."
European banks hold large amounts of European government debt and would have the most to lose in the event of a default by a European country, something investors around the world have been increasingly fearful of. Their stocks jumped as well.
Wednesday's coordinated action by the central banks of Europe, the U.S., Britain, Canada, Japan and Switzerland greatly alleviated those worries by cutting short-term borrowing rates to banks, giving them much easier access to money.
The central banks were responding to fears that Europe's two-year old debt crisis could escalate suddenly, touching off a global credit freeze similar to what followed the 2008 collapse of Lehman Brothers. The decision to allow Lehman to fail is now widely seen as a mistake.
The Dow Jones industrial average jumped 396 points, or 3.4 percent, to 11,952 as of 1:45 p.m. The Dow has more than gained back the 564-point slump it had last week and is up 6.6 percent so far this week.
The Standard & Poor's 500 index gained 39, or 3.3 percent, to 1,234. The Nasdaq composite index jumped 81, or 3.2 percent, to 2,596.
Borrowing rates for European nations have skyrocketed on concerns that the European debt crisis has engulfed nations such as Italy which are too big to bail out. Borrowing rates for Italy, Spain and others have soared.
Banks need dollars to fund their daily operations. Their access has dried up as U.S. money market funds reduced their lending to European banks.
The central banks' action takes some pressure off the financial system, which has signaled in recent days that banks are losing faith in their trading partners. Banks need to trust each other to maintain healthy flows of credit and keep the system working.
Some traders cautioned that Wednesday's action doesn't address the fundamental problems posed by heavily indebted European nations.
"People are taking comfort that it's globally coordinated," said Peter Tchir, who runs the hedge fund TF Market Advisors. "In itself it does nothing, but the bulls are anticipating that this is just the beginning of central bank and other actions" to ease market pressures.
A successful action would be expected to reduce borrowing costs for Italy and other nations, Tchir said. Italy's borrowing costs edged lower Wednesday, but the nation was still paying more than 7 percent interest for 10-year borrowing ' a dangerously high level.
European finance ministers in Brussels have been meeting since Tuesday but have failed to deliver a clearer sense of how the currency union will proceed.
Investor sentiment was also lifted by China's move to reduce bank reserve levels Wednesday to release money for lending and help shore up slowing growth. Higher growth in China could be crucial for a global economy that's suffering in the wake of European debt crisis.
Beijing announced that the amount of money China's commercial lenders must hold in reserve will be cut by 0.5 percent of their deposits, effective Dec. 5. It was the first easing of monetary policy in three years and analysts are expecting more.
AP Business Writer Pallavi Gogoi in New York contributed to this report.