Euro and stocks rally as ECB hints about action

A man is reflected on an electronic monitor displaying share prices outside a brokerage in Tokyo July 9, 2012.

NEW YORK (Reuters) - The euro and stocks rallied on Thursday after European Central Bank President Mario Draghi pledged to do whatever is necessary to protect the euro zone from collapse.

The comments from Draghi drove Spanish 10-year bond yields below the 7 percent mark widely viewed as unsustainable for the government to fund itself. Earlier yields had brushed 7.5 percent.

Draghi's pledge appeared to be a message to the bond market, a key battleground of the euro-zone crisis as markets have forced Spanish and Italian borrowing costs ever higher.

In explaining his comments, his boldest to date, Draghi said the high borrowing costs that some countries must pay to fund their debt was within the ECB's mandate for action.

"The overarching concern over the last week or so has been that the euro zone is slowly melting into the Mediterranean," said Art Hogan, managing director of Lazard Capital Markets in New York.

"To have Draghi come out and say, 'Listen, we are keeping this together' ... is going to add support to the market that is otherwise not there."

Concerns grew this week that Greece could leave the euro zone and that Spain was close to asking for a bailout, which the bloc could ill afford.

Speculation had been rising that the ECB, whose policymakers meet next week, was considering new measures to tackle the euro zone's debt crisis.

Investors were, nonetheless, concerned about how long Draghi's remarks would sway markets without some follow-up action.

Hopes that the Federal Reserve will boost efforts to stimulate the U.S. economy as early as next week, when its policy-setting committee meets, gave Wall Street further support. Top Fed officials recently spelled out what measures they might take to boost growth and hiring.

The Dow Jones industrial average .DJI rose 211.88 points, or 1.67 percent, to 12,887.93 at the close. The S&P 500 Index .SPX gained 22.13 points, or 1.65 percent, to end at 1,360.02. The Nasdaq Composite .IXIC added 39.01 points, or 1.37 percent, to close at 2,893.25.

The FTSEurofirst .FTEU3 closed up 2.4 percent, its largest daily gain in a month, and the MSCI world equity index .MIWD00000PUS gained 2.1 percent after falling four sessions in a row.

The euro briefly edged above $1.23, also aided by data showing a drop in U.S. pending home sales. Separate data earlier showed U.S. applications for first-time unemployment insurance fell last week to nearly a four-year low.

Other U.S. data on Thursday showed new orders for long-lasting manufactured goods rose in June although a gauge of business spending plans dropped, pointing to a slowdown in factory activity.

Economists said the reports did little to change the view that the economy was stuck in a rough patch, supporting market expectations of central bank stimulus actions.

"For weeks, we've been seeing this tug of war between central bankers who want to prop things up, and the reality of the deteriorating economic conditions that are affecting earnings," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

The euro was last up 1.02 percent at $1.2280 after hitting a session high of $1.2329. It touched its lowest in two years at $1.2040 on Tuesday.

Some analysts said there was little new or of substance in comments by policymakers and they expected traders to eventually sell the euro into any rally.

They said the past two days' gains may have been overdone and the euro could re-test recent lows.

"The only thing that could change the downtrend in the euro is if the Fed launched further quantitative easing or some other additional policy measures. Otherwise, it's all about what happens in the euro zone," said Richard Falkenhall, currency strategist at SEB in Stockholm.

Prices for safe-haven 10-year German bonds fell, as well as for U.S. benchmark Treasuries. The 10-year U.S. Treasury note was down 10/32, with the yield at 1.44 percent.

BOND BUYING REDUX?

Analysts said Draghi's comments could be a reference to plans to restart the ECB's bond-buying scheme, known as the Securities Markets Programme (SMP), which has not been used for months but still exists.

European Commission President Jose Manuel Barroso is due to hold talks with Greek Premier Antonis Samaras in Athens later, as a group of international lenders try to decide whether to keep releasing funds from a 130-billion-euro bailout package.

Oil futures pared gains but rose for a third straight day after Draghi's comments, with U.S. labor market data providing further support. <O/R>

Brent crude for September delivery gained 88 cents to settle at $105.26 a barrel and U.S. crude for September delivery rose 42 cents to settle at $89.39 a barrel.

Copper prices rose 0.3 percent, cutting an earlier gain of more than 1 percent.

(Reporting by Rodrigo Campos, Additional reporting by Edward Krudy, Anna Louie Sussman and Nick Olivari; Editing by Kenneth Barry and Jan Paschal)