US Stocks Surge On Draghi’s Euro Pledge; EWP Flies, VIXY Crashes

Ulli Market Commentary Contact

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US stocks rallied Thursday after European Central Bank President Mario Draghi said in London the central bank will do whatever is required to preserve the euro, boosting investor sentiment. The timing of his announcement was perfect, as there was no opposing view with German chancellor Merkel having gone on vacation, which may make the effect on the market ephemeral in nature.

Risk appetite strengthened further as durable goods order rose faster at 1.6 percent in June than the 0.3 percent that analysts had projected. US Labor Department data showed first time unemployment-benefit claims fell 35,000 to 353,000 last week against economists’ projection of 381,000.

Everything however was not hunky-dory, as data provided by the National Association of Realtors showed the index of pending resale homes dropped 1.4 percent in June, indicating some weakness in the housing market.

The Dow Jones Industrial Average (DJIA) surged 212 points, now up 0.5 percent for the week. Within the Dow, 29 of the 30 components gained. The blue-chip index has added 5.49 percent since January this year.

The S&P 500 Index (SPX) rose 22 points, snapping its losing streak for the first time in five sessions. Led by telecommunications, all the sectors among its 10 business groups closed higher.

The NASDAQ Composite (COMP) added 39 points. Games developer on the Facebook platform Zynga (ZNGA) crashed 37 percent on weak quarterly results.

Treasuries retreated following three consecutive up sessions after ECB’s Draghi hinted the central bank will start buying bonds from the secondary market to bring down unsustainable Spanish and Italian borrowing costs.

US 10-year Treasury yield gained three basis points to 1.43 percent while yield on 30-year bond traded two basis points higher at 2.49 percent in late afternoon business, New York time.

ETFs in the news:

Following Draghi’s assurance that ECB’s intervention would be sufficient to contain the current euro-wide crisis, most-oversold country-linked ETFs soared the highest.

The iShares MSCI Spain Index Fund shot up 7.15 percent after days of weakness while the country’s 10-year borrowing costs fell below 7 percent after touching 7.75 percent yesterday.

The iShares MSCI Italy Index Fund (EWI) vaulted 6.53 percent though both EWP and EWI are trading below their 50- and 200-day moving averages.

Telecommunications stole the day’s show today after Sprint Nextel (S) soared 20 percent on better customer spending, though losses widened in the second quarter, largely due to Nextel shutdown costs. Prepaid wireless service-provider MetroPCS leapt 36 percent after quarterly profits surged 77 percent.

The iShare’s Dow Jones U.S. Telecommunications Index Fund (IYZ) jumped 4.21 percent while the Vanguard Telecommunication Services ETF (VOX) rose 3.27 percent.

As risk appetites improved, volatility cooled off following Draghi’s news conference in London today. The so-called fear-tracking CBOE Volatility Index (VIX) plunged 9.36 percent, dragging the ProShares VIX Short-Term Futures (VIXY) down 7.60 percent today.

Other VIX-linked products like the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) also plummeted, shedding 7.61 percent for the day.

For the effect of this past week’s roller coaster ride on our momentum numbers, and the Trend Tracking Indexes (TTIs), please see my latest StatSheet update, which will be posted later on this evening.

Disclosure: No holdings

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