Hong Kong: The euro rebounded from 14-month lows and Asian stocks jumped on Monday after the European Union and IMF carved out an emergency rescue package of up to €750 billion ($1 trillion) to keep Greece’s debt crisis from spreading through the euro zone.
The size of the package and an unexpected pledge by the European Central Bank to buy euro zone bonds if needed gave investors some confidence to return to riskier assets such as stocks, though questions remained about how the scheme would work.
Major global central banks moved swiftly to support Europe, re-establishing dollar swap facilities used during the 2007-2008 financial crisis to help ease strains and ensure there was enough liquidity to keep global credit markets from seizing up again.
“These measures are a game changer in the near to medium term,” said Dariusz Kowalczyk, chief investment strategist for SJS Markets, adding the aid package was big enough to deter speculation in the short term about a Greek debt default.
Others agreed the move had at least bought Europe some time as it tries to calm markets, but High Frequency Economics said in a research note that the package was “still too vague to understand”.
The euro rose to as high as $1.2982 by mid-afternoon, up around 1.7% and pulling away from a 14-month low of $1.2510 hit on trading platform EBS last week.
European and US stocks were also seen opening higher.
Britain’s FTSE 100, Germany’s DAX and France’s CAC 40 was seen up as much as 2.8%, according to financial bookmakers. S&P futures rose nearly 3%.
But gains in Asia were tempered by caution about how the emergency package will be funded and concerns about longer term structural problems in the euro zone.
The MSCI ex-Japan index rose 3.1%, while Japan’s Nikkei ended up 1.6% but off the day’s high.
The MSCI Asia ex-Japan index fell for five straight days last week for a loss of 8.4%, wiping out its gains so far this year and its highest percentage weekly loss since November 2008.
“Investors now want to see how European and US stocks perform overnight. Caution also remains as reasons behind the abnormal slide in US stocks last week still haven’t been identified,” said Kazuhiro Takahashi, general manager at Daiwa Securities Capital Markets.
The Dow Jones Industrial Average suffered a so far unexplained plunge of nearly 1,000 points at one point on Thursday as Greece’s debt problems intensified.
Though Wall Street later recouped most of the sharp losses, with traders initially suspecting a technical glitch, investors’ nerves remain frayed by the extreme volatility in recent days.
Kowalczyk said global risky assets — equities, commodities and emerging market assets — would be boosted by the latest EU support measures but added the euro will soon slip again because of the liquidity boost provided by ECB.
The ECB surprised analysts by saying it will buy euro zone government bonds to help support fractured markets, abandoning its resistance to full-scale asset purchases.
While some analysts had urged the central bank to push such a financial “nuclear button” to defuse the escalating debt crisis, others said buying bonds could be tantamount to printing money to finance Greece’s fiscal deficit.
Before the European announcement, data from the Commodity Futures Trading Commission showed euro sceptics’ bets against the common currency hit a record high in the week ending 4 May.
Financial markets have been punishing heavily indebted euro zone members, threatening to plunge them into the same sort of crisis as Greece, which could derail the global economic recovery.
The new safety net was meant to protect other countries with bloated budgets, such as Portugal, Spain and Ireland.
As jitters over euro zone finances battered global markets, investors have dumped riskier assets for safer ones such as the US dollar, creating fears of dollar shortages in some countries and driving up dollar funding costs.
“While the ECB’s intervention (in bond markets) might attract bad press regarding its mandate and independence, we believe that this was necessary to short circuit the negative feedback loop which was getting more and more threatening for the global economy,” the Royal Bank of Scotland said in a research note.
“Sceptics will probably argue that this does not solve the medium term debt overhang issues plaguing the periphery (other weak euro zone countries). However they won’t deny that this will give them a chance to implement some fiscal consolidation plans to restore market confidence in the sustainability of public finances in the euro area.”
Oil rose 3% to above $77 a barrel on hopes that the EU deal will prevent broader damage to Europe’s economy which would have dampened energy demand.
Gold tumbled as much as 1.5% to $1,195.20 an aounce, down from a near record-high of $1,213.35 hit Friday.
The US dollar was firmer against the yen at 92.64 and well off Friday’s five-month lows of 88.00. It was down 1% against a basket of major world currencies.
US Treasuries were broadly weaker amid optimism about the plan, adding to Friday’s losses after the US Labor Dept reported larger-than-expected employment gains in April, suggesting the economic recovery was well underway.