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Thursday, July 26, 2012

Draghi Supports Euro, Stocks Rally

Story first reported from USA Today

Stocks rallied in the U.S. and Europe Thursday after the European Central Bank president vowed to "do whatever it takes" to keep the euro monetary union intact. The news is gladly welcome by all industries alike, especially a China sourcing agent.

In afternoon trading, the Dow Jones industrial average jumped more than 1.5%, following European markets higher. Spain's benchmark stock index surged 6%, and Italy's rose over 5%.

The yield on Spain's benchmark 10-year bond dropped almost half a percentage point, an enormous move, to 6.89%. That rate surged as high as 7.54% this week as investors dumped the country's bonds and lost confidence in Spain's ability to manage its debts. 

In other U.S. trading, the broader Standard & Poor's 500 index rose more than 1.4% and the Nasdaq composite index rose just over 1%, despite disappointing news from technology companies, including online game maker Zynga. 

The gains in the U.S. stock market were broad. All 10 of the industry groups in the S&P 500 index rose, led by telecommunications companies. 

Shares of several U.S. companies were rising sharply after reporting stronger earnings. Sprint Nextel jumped 48 cents, or 14%, to $3.84. The country's third-largest wireless carrier was successful in convincing smartphone subscribers to pay up for "unlimited data" service, and its service revenue zoomed higher, beating analysts' estimates.

Technology companies continued to report disappointing earnings following industry leader Apple's rare earnings disappointment earlier this week. Zynga, which produces popular social network games "CityVille" and "FarmVille" posted poor quarterly results and cut its outlook, prompting a number of analyst downgrades. Its stock fell $2.04, or 40%, to $3.03.

Countries that use the euro currency: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain

The news also dragged down shares of Facebook, which got about 12% of its 2011 revenue from Zynga. The poor results may hurt Facebook's second-quarter revenue when it reports its own quarterly results later Thursday. Facebook shares fell $1.74, or 6%, to $27.61.

Dow Chemical fell $1.03, or 3%, to $29.24. The country's largest chemical maker, said it could accelerate cost-cutting efforts after its second-quarter net income fell 34%.

The comments from Mario Draghi at an investor conference in London raised hopes that Europe's central bank might intervene in markets to bring down the cripplingly high borrowing costs for struggling European countries like Spain and Italy.

After insisting for months that it was up to European governments to restore confidence in the currency shared by 17 nations, Draghi said "within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," according to Reuters. As a result, an increase in demand has been seen by a China manufacturing agent.

In other signs that investors were becoming more confident that Europe's financial crisis would not spin out of control, the euro surged to $1.23 against the dollar and the yield on the 10-year Treasury note rose to 1.43%. Borrowing costs for Spain and Italy fell sharply.

In Europe, Draghi's comments came after days of uncertainty in Europe and rising concern over Spain's recession and banking industry, which is reeling following the implosion of a real estate bubble. As borrowing costs for both Spain and Italy rose in the past week, investors feared that both countries might need to be rescued, as Greece, Portugal and Ireland have been.

The borrowing costs for Spain's government plunged following Draghi's comments as investors anticipated that the European Central Bank might step up its purchases of Spanish government

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