Aug. 21 - Global stocks rally to 3-1/2-month highs and the euro hits a seven-week peak against the U.S. dollar on hopes the European Central Bank will soon start buying Spanish and Italian bonds to contain the debt crisis. Jamie McGeever reports.
Investors snapped up 4.5 billion euros of Spanish bills in the latest auction on Tuesday...but it could soon be the European Central Bank buying Madrid's debt. The ECB has sought to cool media speculation it will soon buy the bonds of indebted countries if their borrowing costs threaten to go beyond a certain level. ECB president Mario Draghi's recent comments show some form of intervention in the bond market is coming. But just what form that takes, is still up in the air. Daniel Alvarez is an analysts with XTB in Madrid (SOUNDBITE) (Spanish) DANIEL ALVAREZ, XTB ANALYST, SAYING: "It's true the ECB, with its usual slowness and even clumsiness, continues its denial saying there is still no agreement on the table. It could be that this is a strategy to satisfy German interests but it seems that where there is smoke, there is fire and it's likely - at least we are optimistic - the ECB will over the next few days take some sort of action in the direction of debt purchasing." In what are classic summer market conditions - extremely light volume and much of Europe shut down for holiday - investors latched onto the suggestions in German weekly Der Spiegel. Despite the ECB's partial denial, the euro and Spanish bonds rose, and stocks remained firm. The euro was at a 2-week high above $1.24, Spanish 10-year borrowing costs fell to a 7-week low of 6.2 percent. And European stocks hovered close to a 13-month high, up around 16 percent since June. Berenberg Bank's chief economist Holger Schmieding is optimistic. (SOUNDBITE) (English): HOLGER SCHMIEDING, CHIEF ECONOMIST BERENBERG BANK, SAYING: "If they really were to impose a cap on yield spreads in the euro zone for those sovereigns who do their homework they could diffuse the euro crisis a lot - it is apparently one option which the ECB is discussing. If they were to take that option it would almost be a dream come true." So investors are clearly betting on the ECB taking action to ease the crisis. Europe's politicians are also back to work, there's a round of shuttle diplomacy this week between the leaders of Germany, France and Greece. Jamie McGeever, Reuters