Worlds stocks rise on ECB, Fed hopes; euro falls

NEW YORK Mon Jul 30, 2012 4:48pm EDT

A man passes a screen showing the activity of the FTSE index at Canary Wharf financial district in London August 5, 2011. REUTERS/Luke MacGregor

A man passes a screen showing the activity of the FTSE index at Canary Wharf financial district in London August 5, 2011.

Credit: Reuters/Luke MacGregor

NEW YORK (Reuters) - Global stocks rose on Monday on expectations that the European Central Bank and the U.S. Federal Reserve will take measures to support struggling economies when they meet this week, but the euro slid against the dollar on worries that the central banks will act less aggressively than hoped.

There are strong expectations that the ECB will act forcefully to rein in the euro zone's debt crisis when it meets on Thursday, after ECB President Mario Draghi's comments last week that the central bank would do whatever it takes to preserve the euro.

But there is more skepticism about what the Fed will do at its two-day meeting that begins on Tuesday. Many economists believe the U.S. central bank will wait until September to provide more stimulus to a faltering U.S. economic recovery.

The cloudy outlook on just what the central banks will do this week also weighed on U.S. stocks on Monday.

"Certainly everyone thinks that Europe is going to come out with this big bazooka, and they also think the Fed will launch, so therefore the market is going to stay up here," said Ken Polcari, managing director at ICAP Equities in New York.

U.S. Treasury Secretary Timothy Geithner and Germany's Finance Minister Wolfgang Schaeuble, in a joint statement issued after their meeting on Monday, emphasized "the need for policymakers to adopt and implement all reform steps required to deal with the financial crisis and crisis of confidence."

The euro fell against the dollar for the first time in four sessions on worries that the ECB may disappoint investors hoping for more measures to contain the debt crisis.

The euro lost 0.5 percent to $1.2258, retreating from a three-week high of $1.2390 hit on Friday.

"Traders were in a 'show me' mode, with enthusiasm fading over last week's comments by both Mario Draghi and Angela Merkel in support of the euro," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

Speculation has grown that the Fed will do more to bolster the recovery after data on Friday showed U.S. second-quarter gross domestic product expanded at a 1.5 percent annual rate, the weakest pace since the third quarter of 2011.

Bank of America-Merrill Lynch analysts said in a research note that the Fed should extend its forward guidance language on maintaining ultra-low rates to "at least late 2015" at this week's meeting. They said that while there is a moderate chance that the Fed will launch additional quantitative easing, it is more likely the Fed will announce a third round of asset purchases in September.

The MSCI world equity index .MIWD00000PUS rose 0.4 percent, extending gains for a third straight day.

The FTSEurofirst 300 .FTEU3 advanced 1.6 percent to 1,072.97 points, its highest close since April 2, having soared more than 5 percent in three days.

U.S. STOCKS END NEAR FLAT; BONDS RISE

But Wall Street closed edged lower as investors paused following the best two-day run this year that drove the Dow above 13,000 for the first time since early May and gave the S&P 500 its biggest two-day rally since December.

The Dow Jones industrial average .DJI was down 2.65 points, or 0.02 percent, at 13,073.01. The Standard & Poor's 500 Index .SPX was down 0.67 points, or 0.05 percent, at 1,385.30. The Nasdaq Composite Index .IXIC was down 12.25 points, or 0.41 percent, at 2,945.84.

Blue chips Wal-Mart Stores (WMT.N) and AT&T (T.N) hit 52-week highs. Wal-Mart rose 0.6 percent to end at $74.98 after hitting $75.24 earlier. AT&T added 0.8 percent to close at $37.43 after hitting $37.69.

"With all that news later in the week and after the big run, I think there's probably a little bit of hesitation to run ahead of these numbers," said Janna Sampson, co-chief investment officer at OakBrook Investments in Lisle, Illinois.

Brent crude for September delivery settled at $106.20 a barrel, down 27 cents, while NYMEX crude for September delivery settled at $89.78 a barrel, down 35 cents.

Spot gold declined 0.3 percent to $1,618.09 an ounce.

In the U.S. bond market, the benchmark 10-year U.S. Treasury note rose 13/32, with the yield at 1.4985 percent.

Action by the central banks could favor riskier assets, to the detriment of safe-haven Treasuries. But they could also favor riskier assets and Treasuries simultaneously, especially if they include more bond purchases by the Fed in the open market.

Morgan Stanley Smith Barney "expects action from the Fed and the ECB this week," said Charles Reinhard, managing director and global investment strategist at Morgan Stanley Smith Barney in New York.

"With Draghi saying the ECB will do what it takes, we presume they will be purchasing bonds," he said. "In doing so, the ECB will be catching up to the curve after previously being behind the curve."

Inflows into safe-haven German government bonds slowed, keeping prices close to three-week lows.

Germany's Bundesbank is opposed to a resumption of the ECB's secondary market bond buying as well as granting the euro zone rescue funds a banking license, which would give them more firepower to tackle the debt crisis.

(Additional reporting by Chuck Mikolajczak, Julie Haviv and Ellen Freilich in New York; Editing by Kenneth Barry, Leslie Adler and Jan Paschal)

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