Stocks head higher on lowered borrowing rates

Stocks soared in morning trading Wednesday after major central banks acted together to support the global financial system by cutting short-term borrowing rates. The Dow Jones industrial average jumped more than 400 points in early trading Wednesday, and was up 392 hour after the opening bell. Markets in Europe also surged. Germany’s DAX index jumped 4.9 percent. The euro and commodities prices rose sharply. U.S. Treasury prices fell as demand weakened for ultra-safe assets. The central banks of Europe, the U.S., Britain, Canada, Japan and Switzerland eased banks’ access to dollars by reducing their borrowing rates. They were responding to fears that a European country will default, touching off a credit crunch similar to what followed the 2008 collapse of Lehman Brothers. Borrowing rates for European nations have skyrocketed on concerns that the European debt crisis has engulfed nations such as Italy which are too big to bail out. Borrowing rates for Italy, Spain and others have soared. Banks need dollars to fund their daily operations. Their access dried up as U.S. money market funds reduced their lending to European banks. The central banks’ action takes some pressure off the financial system, which has signaled in recent days that banks are losing faith in their trading partners. Banks need to trust each other to maintain healthy flows of credit and keep the system working. The Dow Jones industrial average leaped 392 points, or 3.4 percent, to 11,948 at 7:20 a.m. Pacific time. It rose by 424 points by 8 a.m. Pacific time. Over the past three days the Dow has gained back all of the 564-point loss it had over Thanksgiving week. The Standard & Poor’s 500 index jumped 39, or 3.2 percent, to 1,234. The Nasdaq composite index gained 78, or 3.1 percent, to 2,594. The move by central banks does not address the fundamental problem posed by heavily indebted European nations. European finance ministers in Brussels have been meeting since Tuesday but have failed to deliver a clearer sense of how the currency union will proceed. Investor sentiment was also lifted by China’s move to reduce bank reserve levels Wednesday to release money for lending and help shore up slowing growth. Higher growth in China could be crucial for a global economy that’s suffering in the wake of European debt crisis. Beijing announced that the amount of money China’s commercial lenders must hold in reserve will be cut by 0.5 percent of their deposits, effective Dec. 5. It was the first easing of monetary policy in three years and analysts are expecting more.