Stocks surged Thursday on a combination of surprisingly strong U.S. economic data and the overwhelming approval by Germany’s parliament of a bill to strengthen a bailout fund intended to help European countries deal with their debts.
News that the U.S. economy grew by more than previously thought in the second quarter of the year and a surprisingly large drop in weekly jobless claims were the main catalysts behind the advance. Stocks are a leading indicator of future economic activity and the better than expected U.S. economic data has reined in fears over the global economic recovery.
Alongside concerns over Europe’s debt crisis, investors have been spooked by a run of weak U.S. economic data over the past couple of months — the result has been huge turmoil in financial markets.
But news that the U.S. economy grew at an annual rate of 1.3 percent in the April-June quarter, up from an estimate of 1 percent made a month ago has calmed some investor fears about the world’s largest economy, especially as the improvement largely reflected more consumer spending.
“The quality of the improvement far outweighs the scale of improvement with the U.S. consumer key to future growth,” said Michael Woolfolk, an analyst at The Bank of New York Mellon. “The risk for the third quarter is to the upside, with the outside possibility that it could well come in at the upper end of the 2.0-3.0 percent range.”
Further good news emerged from the Labor Department, which found that jobless claims last week dropped 37,000 to a seasonally adjusted 391,000, the lowest level since April 2. It’s the first time applications have fallen below 400,000 since Aug. 6. and the figures could prompt investors to upgrade their forecasts for next week’s nonfarm payrolls figures for September.
The mood in stock markets had already been largely positive after a clear victory for Chancellor Angela Merkel in a vote on beefing up Europe’s bailout fund. More encouraging for the markets, perhaps, was the fact that Merkel did not have to rely on support from opposition parties.
In the short-term, the markets’ hope is that the vote in favor of an expanded rescue fund — with 523 lawmakers in favor, 85 against and 3 abstentions — indicates Germany is fully behind efforts to shore up Europe’s defenses against a crisis that has already seen three countries bailed out and stoked talk that Greece will default.
Germany is the biggest economy among the 17-countries that use the euro currency and has to contribute more than others to boosting the firepower of the bailout fund, the so-called European Financial Stability Facility, or EFSF. If passed, Germany will be guaranteeing loans in the future for up to €211 billion ($288 billion), rather than €123 billion so far.
“The overwhelming majority in the Bundestag is a good sign and will hopefully mark a step change in German commitment to bringing the spiraling crisis under control,” said Sony Kapoor, managing director of Re-Define, an economic think-tank.
In Europe, Germany’s DAX closed 1.1 percent higher at 5,639.58 while France’s CAC-40 rose 1.1 percent to 3,027.65. The FTSE 100 index of leading British shares was underperforming, slipping 0.4 percent to 5,196.84.
U.S. stocks rallied — the Dow Jones industrial average was up 1.7 percent at 11,194.28 while the broader Standard & Poor’s 500 index rose 1.2 percent to 1,165.32.
The improved appetite for risk on Thursday also helped the euro brush off another survey showing that Europe’s economy was grinding to a halt. When risk appetite is high, the euro usually garners support against the dollar. Following the German vote, it was trading 0.7 percent higher at $1.3641.
In its monthly survey of economic conditions around the 17 countries that use the euro, the EU’s executive arm, the European Commission said confidence fell further in September following the previous month’s precipitous collapse. Its economic sentiment indicator stands at 95, against August’s 98.4, and is below the long-run average. The last time it was lower was in December 2009.
The further decline in confidence is likely to put pressure on the European Central Bank to start cutting interest rates again, if not in October, then in November when Italy’s Mario Draghi will have replaced the current head Jean-Claude Trichet.
Earlier in Asia, Japan’s Nikkei 225 index swung between gains and losses before finishing up 1 percent to 8,701.23. South Korea’s Kospi index shot up 2.7 percent to 1,769.29. China’s Shanghai Composite Index dropped 1.1 percent to 2,365.34. Markets in Hong Kong were closed due to severe weather.
Oil prices tracked equities higher too — benchmark crude for November delivery rose $1.16 to $82.37 per barrel on the New York Mercantile Exchange.