All three major U.S. stock market indices rebounded Wednesday and Thursday following a string of losing sessions due to easing borrowing costs for several EU nations. At the closing bell, the Dow Jones had gained 1.4 percent Thursday to close at 12,986 while the NASDAQ Composite surged 1.3 percent to 3,055. The S&P 500 meanwhile rebounded as well, posting a 1.4 percent jump to 1,387.
The major market factors both Wednesday and Thursday turned out to be a temporary easing in bond yields for struggling Eurozone nations such as Spain and Italy, which have both had recent difficulties in attracting investment in their sovereign debt. Earlier in the week, Spanish bond yields had reached as high as 5.83 percent on 10-year notes while similar Italian instruments were over 6 percent. However, those interest rates are now down as much as 5%, which represent lower borrowing costs for the sovereign nations.
The Italian parliament late last year passed a round of austerity measures in order to prepare for the reception of potential central bank bailout loans in the future, but many investors believe the nation will be unable to get its spending under control during the long term. Current Prime Minister Mario Monti has stated that his country’s deficit spending much be reigned-in if Italy is serious about reducing its overall debt.
Central Bank Actions
In the past, the European Central Bank seemed more apt to approve bond purchasing programs in order to absorb sovereign debt and extend bailouts to EU nations. However, late last year the ECB authorized a record €489 billion emergency loan package to struggling regional financial institutions instead of extending the gesture toward nations.
The result means that banks hold a significant amount of fiat assets, and consequently hold a substantial amount of purchasing power over Eurozone nations which in many ways must now depend on attracting bank investment in order to continue funding their sovereign debt. The infusion of fiat liquidity into any market generally results in eventual inflation, which makes bond purchasing programs controversial regardless of whether they are provided by central banks or regional financial institutions.
In the United States, the Joint Select Committee on Deficit Reduction failed to reach an agreement last year on how best to implement approximately $1.4 trillion in nationwide deficit reductions, many of which would have affected the Defense budget. Due to the political nature of potential budget cuts to the nation’s Defense expenses, many analysts believe that the U.S. will continue its deficit spending at least in the short term. The U.S. government has benefited greatly from low interest rates on its own sovereign debt, with yields on 10-year Treasury notes remaining close to the 2 percent mark.
Major Market Indices
The Dow 30 index approached the 13,000 points level late Thursday and is up 6.29 percent since the beginning of the year. The NASDAQ and S&P 500 have enjoyed greater Year To Date gains, but will likely be heavily affected by the upcoming Earnings Season in which a number of large cap companies are expected to report their first quarter 2012 profit margins along with future guidance forecasts.
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