US stocks finished the first half of the year with a bang as investors welcomed news that the eurozone is a step closer to solving its 30-month-long debt crisis. Now for the question: Is this rally strong enough to last for more than a day?
The S&P 500 and the Nasdaq posted their best daily percentage gains since December on Friday after an agreement by European leaders to stabilize the region's troubled banks, a pact that helped remove some of the uncertainty that has plagued markets.
"That is the major question. Can this fuel a longer-term rally? It can, but only to some degree if, over the weekend and the course of next week, we don't see any major push back or headlines that suggest that this deal is not going to happen," said Quincy Krosby, a market strategist at Prudential Financial.
"But I don't think this is a major game changer. I do, however, think that this is really the first time we got a relatively immediate answer to what they (the euro-zone leaders) are going to do about the issue."
Under pressure to prevent a catastrophic breakup of their single currency, euro-zone leaders agreed on Friday to let their rescue fund inject aid directly into stricken banks starting next year and intervene in bond markets to support troubled member-states.
They also pledged to create a single banking supervisor for eurozone banks based around the European Central Bank in a landmark first step to ward a European banking union that could help shore up struggling member Spain.
Wall Street's previous reaction to euro-zone bailout packages or other rescue plans had been somewhat muted. Initial gains would quickly disappear by the day's end as investors realised that there isn't a quick fix to the region's problems.
On Friday, it was a different story. The three major US stock indexes jumped 1.5 percent to 2 percent shortly after the opening bell on news of the euro-zone agreement.
By the close, stocks ended at session highs with the major indexes up between 2 percent and 3 percent. The Dow Jones industrial average surged 277.83 points, or 2.20 percent, to end at 12,880.09. The Standard & Poor's 500 Index jumped 33.12 points, or 2.49 percent, to finish at 1,362.16. And the Nasdaq Composite Index shot up 85.56 points, or 3.00 percent, to close at 2,935.05.
For the week, the Dow rose 1.9 percent, the S&P 500 advanced 2 percent and the Nasdaq gained 1.5 percent.
For the month, the Dow added 3.9 percent, the S&P 500 rose 4 percent and the Nasdaq climbed 3.8 percent.
But for the second quarter, the Dow dropped 2.5 percent, the S&P 500 slid 3.3 percent and the Nasdaq lost 5.1 percent.
Despite the weak second quarter, the three major US stock indexes wrapped up the first half of the year with decent gains: The Dow was up 5.4 percent, the S&P 500 was up 8.3 percent and the Nasdaq was up 12.7 percent.
"The next question is whether the ESM/EFSF will have enough capital and assuming they don't, will the ECB chip in by giving it a bank license, thus leveraging its size. That is yet to be determined," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. Any market reaction to further developments next week could be exaggerated by lighter-than-usual volume. Wall Street trading desks may be more sparsely populated because it will be a short week. The US stock market will be closed on Wednesday, the Fourth of July, in observance of Independence Day. That could break any weekly momentum when Wall Street resumes trading on Thursday.
The market's focus shifts to the European Central Bank next week as investors wait to see whether it cuts interest rates to complement the measures taken by EU leaders to shore up banks and bring down borrowing costs for Spain and Italy.
Most economists polled by Reuters expect the ECB to cut borrowing costs o n Thursday, July 5, at its meeting, which takes place against a darkening economic backdrop.
But internal resistance to the central bank reviving its bond-buying program remains high. The ECB has already loosened its collateral rules to make it easier for banks in Spain to access its funds.
European bond yields will be closely watched next week. Madrid will auction three-year, four-year and 10-year bonds at a primary auction on Thursday in another big test for Spanish yields that are still not far below 7 percent. France will sell between 7 billion and 8 billion euros in long-term bonds on Thursday.
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