July 28, 2012 in Business

European pledge carries the day

Christina Rexrode Associated Press
 

NEW YORK – Faced with Facebook, Starbucks and Angela Merkel, the market chose to focus on Merkel.

For a second day, the U.S. stock market powered higher after European leaders, including German Chancellor Merkel, pledged to protect the union of 17 countries that use the euro. The Dow Jones industrial average blew past 13,000, a key psychological marker that it hadn’t hit since early May.

It wasn’t that there weren’t any troubling signs about the economy. In fact, they abounded: U.S. economic growth was anemic in the second quarter. A measure of consumer sentiment fell in July as people worried about their job prospects. And Facebook and Starbucks dropped sharply after reporting disappointing quarterly results.

But on this day, investors homed in on a couple of remarks coming from Europe.

Most notably, Merkel and French President Francois Hollande released a joint statement saying they were “determined to do everything to protect the eurozone.” That followed a similar pledge the day before from Mario Draghi, the president of the European Central Bank.

Merkel’s statement was closely watched because Germany will have to sign on if any plan to keep the euro countries together is to succeed. As one of the stronger countries, Germany usually foots the bill for bailing out the weaker ones.

For all the rejoicing, a long-standing roadblock remains: Strong countries like Germany want other European nations to agree to cut spending. Weaker countries like Greece are resisting. The statement from Merkel and Hollande made clear that individual countries aren’t off the hook, but “must comply with their obligations” – meaning a showdown over spending cuts is still possible.

Bond trading was also a study in optimism. The yield on the benchmark 10-year Treasury note jumped to 1.54 percent from 1.44 percent the day before. That means investors are feeling more confident about the economy and more willing to put their money in the stock market instead of low-risk government bonds.

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