ECB Plan, Economic Data Shoot ETFs to New Highs

Steven Bobson, Europe & Americas Editor
September 07, 2012 /

The European Central Bank bond-buying plan, an upbeat U.S. employment report and a positive surprise in the services sector sent exchange traded funds sharply higher around the world Thursday.

SPDR S&P 500 ( SPY ) rallied 2.02% to 143.75 — its highest level since May 2008.PowerShares QQQ ( QQQ ), tracking the 100 largest nonfinancial stocks on the Nasdaq, surged 2.22% to 69.53 — a 12-year peak.

SPDR Dow Jones Industrial Average ( DIA ) climbed 1.77% to 132.82 — just a hair below its 52-week high.

“I think today is a nice, emotional, knee-jerk, uptick response to the news,” said Adam Koos, president of Libertas Wealth Management. “With every piece of news like this, it’s going to make it more difficult for (Fed Chairman Ben) Bernanke to issue stimulus come Thursday next week.”

IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, jumped 2.49% off its 200-day moving average. It landed just below a 53.02 buy point in a bullish cup-with-handle chart pattern.

IShares MSCI Emerging Markets Index ( EEM ) gapped up 2.23%. But it’s still trading below its 200-day average. Its 50-day average has crossed below its 200-day line, which is bearish.

At a press conference in Frankfurt, ECB President Mario Draghi announced the ECB would buy unlimited amounts of government bonds of indebted countries like Spain and Italy in hopes of lowering their borrowing rates. Under the plan, dubbed Outright Monetary Transactions (OMTs), countries seeking help must agree to new austerity measures.

“Draghi has assured that any bounce that he is able to trigger will be short-lived, as fiscal austerity will hurt growth and profits, weaken tax receipts and widen government deficits,” said Robert King, economist at the Jerome Levy Forecasting Center. “Particularly in Spain, where the private sector is facing years of financial retrenchment, attempts at deficit reduction will continue to backfire.”

Many questions remain unanswered, notes David Owen, chief European financial economist at Jefferies.

“Lost in the events of the day is that the ECB (in its latest quarterly staff projections) revised down the level of euro area gross domestic product at the end of 2013 by almost a full 1%,” Owen wrote in a note. “The euro area clearly faces a deteriorating macroeconomic environment, but the ECB stubbornly continues to ignore the elephant in the room.”

Critics say the ECB’s plan achieves nothing and raises false hopes. “The only solution is a massive debt restructure in Europe and until that is discussed, the aftermath of this crisis will be severe,” says Jeffrey Sica, president and chief investment officer of Sica Wealth Management.

U.S. Economy On Growth Path

The market also cheered economic data releases that showed the U.S. economy is riding a modest but positive growth path.

Nonmanufacturing business sector activity rose in August for the 32nd month straight, according to the Institute for Supply Management. Jobless claims fell by 12,000 last week to 365,000 — better than expectations of 370,000. Payroll provider ADP reported businesses added 201,000 jobs last month — the most since March.


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