Stocks’ Surge Wipes Out November’s Declines


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Global financial markets rebounded on Wednesday as soothing news out of China, Europe and the U.S. restored confidence in the world’s economic recovery and brought temporary relief to fears about a debt “contagion” in the euro zone.

In the U.S., the Dow Jones Industrial Average kicked off December—often one of the strongest months of the year—with its best day in three months, adding 249.76 points, or 2.27%, to 11255.78. It was the Dow’s sixth-largest point and percentage gain this year.

The rally began in Asia, where Hong Kong, Seoul and Bombay all gained 1% or more after a strong Chinese manufacturing report. Similar reports from Germany and the U.K. combined with confidence that the European Central Bank will take more assertive action to stanch the region’s debt crisis, driving London’s FTSE 100 index up 2.1% and Germany’s DAX up 2.7%. The euro had its biggest gain in six weeks and bonds of several European peripheral countries rallied for the first time in days.

“All the economies that matter around the world, from the U.S. to China and Germany, are good or improving,” said Tim Holland, a portfolio manager at Aston/Tamro Diversified Equity Fund.

The gains ended a three-day rout across the world’s stock markets that had been fueled by worries that Europe’s debt crisis would deepen and become a drag on the world’s economy. In addition, investors had become concerned that China would stomp the brakes on its economy, snuffing out one of the biggest engines of global growth.

While the reports Wednesday were a salve to the fears, many worry that it could be temporary. Europe still has no clear path to stability and investors remain concerned that China could be heavy-handed in responding to domestic inflation.

In the U.S., most economic reports have been particularly encouraging, including Wednesday’s measure of payrolls showing private employers added more jobs in November and a gauge of manufacturing that showed a 16th straight month of growth. The Fed’s “beige book” also indicated the recovery is strengthening in several key regions of the U.S.

“There’s a growing recognition that the economy may not be in anywhere as bad shape as people thought,” said Brian Gendreau, market strategist with Financial Network, a financial-advisory firm. “We were talking about a double dip just two months ago when the news was mixed, but now the news isn’t even mixed, and … the market is pricing that in accordingly.”

The positive news coincided with a report from Goldman Sachs, which said the U.S. growth outlook “has brightened significantly in recent weeks.” Goldman economists, who have been among the bearish in recent months, raised its growth outlook for 2011 to 2.7%, from a previous prediction of 2.0%. The bank’s economists also predicted a “meaningful drop” in the jobless rate, to 8.5% by the end of 2012, from 9.6% now.

Still, the market gains could be fleeting and investors face a hurdle on Friday, when the Labor Department reports its monthly unemployment figure.

“Today, all of the factors seemed to be moving in a positive direction, but We’re always just one data point away from this market turning in and reversing,” said Alan Gayle, senior investment strategist with RidgeWorth Investments. “If we had a very disappointing unemployment report on Friday, I think people would start to question just how much traction we’re getting in this recovery.”

As in recent months, the soaring stock market was accompanied by a decline in the dollar, which sent commodity prices such as copper oil racing higher.

The euro strengthened dramatically against the dollar, rising to $1.3137, its biggest one-day rise in six weeks. Bonds of peripheral European countries also had a rare day of gains. Borrowing costs for Spain, Portugal, Ireland and Greece all fell relative to German bunds, as did costs for Italy and Belgium, which have also found themselves in the market’s crosshairs. The iTraxx Europe index tracking European default expectations fell about 7%, according to data provider Markit.

Spanish banks, which had been punished in recent days, may have been the biggest beneficiary of the improved sentiment in Europe. U.S.-listed shares of Spanish banking giant Banco Bilbao Vizcaya Argentaria soared 10%, while Banco Santander climbed 8.1%.

The embrace of risk assets caused investors to ditch safe-haven Treasurys, pushing up the yield on the benchmark 10-year note to 2.964%, its highest yield in more than four months.

Underscoring the market confidence, the CBOE Market Volatility Index, the “fear index” known as the VIX, fell as much as 13% during the session. All 30 of the Dow components finished in positive territory and all but 16 stocks in the Standard & Poor’s 500-stock gained.

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