Dow Average Jumps Most Since 2009 as Central Banks Take Action on Crisis

Stocks surged, giving the Dow Jones Industrial Average its biggest rally since March 2009, and the euro strengthened as six central banks made additional funds available to ease strains from Europe’s debt crisis. Treasuries fell while commodities jumped.

The MSCI All-Country World Index climbed 3.7 percent at 4 p.m. New York time and is up 7.6 percent in three sessions. The Dow gained 4.2 percent to 12,045.68, while the Stoxx Europe 600 Index capped its best four-day gain in three years. The dollar weakened against all 16 major peers, with the euro up 0.9 percent to $1.3441. The cost for European banks to fund in dollars retreated from the highest since 2008. Oil jumped to almost $101 a barrel and copper rose 5.5 percent.

The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said, and agreed to make other currencies available as needed. China said earlier today it will cut the reserve requirement ratio for banks by 0.5 percentage points, while data on U.S. business activity and the employment and housing markets topped economists’ estimates.

“I’m in a better mood today than I’ve been in a while,” Burt White, who helps oversee about $315 billion as chief investment officer at LPL Financial Corp. in Boston, said in a telephone interview. “This coordinated effort is a huge one. It is not a European problem, it’s a global problem. If we don’t get Europe solved, it’s going to send pretty big ripples across the globe. We really could see some upside for the market, if this momentum continues.”

Rescue Fund

Euro-area finance ministers said they would seek a greater role for the International Monetary Fund and the European Central Bank in fighting the sovereign debt crisis after conceding an effort to expand their bailout fund missed its target. The ministers yesterday agreed to guarantee as much as 30 percent of new bond sales from troubled governments, and to improve its ability to cap yields by buying bonds. European heads of government will meet in Brussels on Dec. 9 to discuss the crisis.

The new interest rate central banks are offering for dollar funding is the dollar overnight index swap rate plus 50 basis points, a half percentage-point cut, and the program was extended by six months to Feb. 1, 2013, the Fed said today. The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies if needed.

Borrowing Costs

The actions helped ease a surge in borrowing rates fueled by concern about a possible breakup of the euro area.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 131 basis points below the euro interbank offered rate after earlier reaching a three-year high of 163. The U.S. two-year interest-rate swap spread fell the most in nine months. Predictions in the forward markets of how reluctant banks will be to lend in the first quarter dropped from an 18-month high.

“You really needed the central banks to come in and force, if you want to call it, the liquidity into the system,” Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, told Bloomberg Television. “And they recognize the pressure that was building.”

The moves by the central banks fueled speculation that the Fed will cut the discount rate it charges U.S. banks, which has been at 0.75 percent since February 2010, as the changes result in lower borrowing costs for foreign firms.

‘Level the Playing Field’

“Be on the lookout for headlines on this front,"Dan Greenhaus, chief global strategist at BTIG LLC in New York, wrote in a note to clients. Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York, said in a note that a discount-rate cut would ‘‘level the playing field,’’ while Jefferies Group Inc. Chief Financial Economist Ward McCarthy was skeptical the Fed will cut the rate since there is no dollar- funding problem in the U.S.

The Standard & Poor’s 500 Index jumped 4.3 percent, the most since Aug. 11. Today’s rally trimmed the sixth monthly decline in seven for the index, leaving it down 0.5 percent in November. U.S. equities also advanced after companies added 206,000 workers in November, according to data from ADP Employer Services that bolstered optimism in the labor market before a government jobs report in two days. The median forecast of economists surveyed by Bloomberg News called for an increase of 130,000.

Economic Data

Other data showed business activity in the U.S. expanded in November at the fastest pace in seven months, according to the Institute for Supply Management-Chicago Inc. The index of pending home sales increased 10.4 percent in October, the National Association of Realtors said, the biggest gain since November 2010 and five times the median forecast of economists.

The Fed said the economy expanded at a ‘‘moderate” pace in 11 of 12 districts, led by gains in manufacturing and consumer spending. The Fed’s Beige Book survey reinforced the central bank’s view that the economy, while strong enough to skirt a recession, remains too weak to bring down an unemployment rate stuck near 9 percent or higher for more than two years.

Indexes of commodity producers, industrial companies and financial firms jumped at least 5.1 percent to lead gains in all 10 of the main industry groups in the S&P 500. Trading volume of stocks in the index was 45 percent greater than the average over the past 10 sessions, according to data compiled by Bloomberg.

Caterpillar Inc., JPMorgan Chase & Co. and General Electric Co. surged at least 6.6 percent as all 30 stocks in the Dow climbed, sending the gauge up as much as 490 points.

Dollar, Commodities

The dollar weakened against all 16 major peers, with the Australian, South African and New Zealand currencies surging at least 2.5 percent.

The S&P GSCI Index of commodities climbed 0.7 percent and is up 3.4 percent in three days. Zinc, copper and aluminum rose more than 5.2 percent to lead gains today. Among 24 commodities tracked by the index, only seven declined.

Commodities are set for a “difficult environment” in 2012, UBS AG said, citing Europe’s debt crisis and a “hard landing” in China, the biggest raw-materials consumer. The People’s Bank of China cut the amount of cash that lenders must set aside as reserves for the first time since 2008 as Europe’s debt crisis dims the outlook for exports and growth.

European Stocks

More than 27 stocks advanced for every one that declined in the Stoxx 600, sending the benchmark gauge up 3.6 percent and extending its four-day rally to 9.1 percent. Barclays Plc surged and Deutsche Bank AG rallied more than 6 percent. BP Plc, Europe’s second-biggest oil producer, climbed 5 percent and BHP Billiton Plc, the world’s largest mining company, jumped 6.2 percent.

European stocks fell earlier after S&P cut debt ratings on lenders from Bank of America Corp. to Goldman Sachs Group Inc. to UBS AG. More than $3 trillion has been erased from the value of global equities this month as rising borrowing costs in Italy and Spain signaled Europe’s debt crisis was worsening.

The yield on the 10-year Treasury note rose nine basis points to 2.08 percent. Germany’s one-year yield dropped nine basis points to minus 0.01 percent, sinking below zero for the first time ever. Italy’s 10-year bond yield slid 22 basis points to 7.02 percent.

Default Swaps Drop

The cost of insuring against default on European corporate debt fell, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 33 basis points to 758.5, according to JPMorgan Chase & Co. at 3 p.m. in London. A decline signals improved perceptions of credit quality.

The MSCI Emerging Markets Index (MXEF) added 2 percent, trimming this month’s drop to 6.7 percent. Benchmark gauges in Brazil, Russia, South Africa and Turkey gained at least 2.8 percent. Poland’s WIG20 Index jumped 4.8 percent after a report showed the economy grew more than economists forecast in the third quarter. The Shanghai Composite Index (SHCOMP) earlier fell 3.3 percent after central bank adviser Xia Bin said China’s policy “fine- tuning” doesn’t mean credit controls will be loosened.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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