Stocks Surge on EU's Bailout, But How Long Will Rally Last?
Financial markets soared across the globe Monday after the European Union and International Monetary Fund agreed to a $1 trillion emergency bailout to stop the debt crisis from spreading. But market pros are increasingly wondering — is it enough to keep the rally going?
"The EU has taken a decisive action to stamp out the speculative attack against the euro and this should be sufficient to bring some calm into the market," said Klaus Wiener, head of research at Generali Investments. "It has sent a very strong message to the market that the euro will not be allowed to fail."
Not everyone was convinced.
"Germany and other strong European states are chasing a dream," Peter Morici, a professor at the Robert H. Smith school of business, said of the bailout and its promise to hold the EU together.
"More budget crises will follow, if not in Greece then in Portugal, Spain, or perhaps Ireland or Italy, because the euro is simply not backed by a strong central government," Morici wrote in blog on CNBC.com.
Such doubts about the bailout effort prompted many experts to question whether the market rally will be short-lived as well.
"I think this is a short recovery," Jonathan Corpina of Meridien Equity Partners told CNBC. "It is nice to see that the market opened high and stayed high and we've got the volume to support it. But if you take a look at what happened this weekend, this is a short-term solution to a long term problem."
The 16 countries that use the euro and the IMF pledged about $1 trillion of loans and loan guarantees to any euro-zone countries needing funds.
The sheer size was what shocked markets the most: Last week, the EU and IMF had approved a 110-billion euro (US$144 billion) bailout for Greece — this $1 trillion bailout was more on par with the U.S.'s $700 billion Troubled Asset Relief Program (TARP) to stabilize the U.S. financial system after the 2007-2009 crisis.
Stocks rebounded world-wide after last week's nauseating selloff that evoked memories of the selloff that occurred following the collapse of Lehman Brothers as the U.S. financial crisis began.
The Dow Jones Industrial Average rocketed over 400 points, or nearly 4 percent. and the CBOE volatility indexfalling below 30, after surging above 40 last week.
Financials, industrials and techs — the stocks that got hammered the most last week — led the pack today.
Treasury prices slipped, with the the 10-year down 1 4/32, pushing the yield up to 3.57 percent from Friday's close of 3.44 percent.
Some traders noted muted reactions in the euro and gold as evidence that the rally won't last.
The euro gained about 1.6 percent to $1.2967, while gold was still holding above $1,200.
And there's a lot of speculation that, despite the bailout's size, that it would only provide a temporary fix.
"Euro zone policymakers surprised probably even the most optimistic observers by presenting a quick and forceful, unprecedented crisis package," ING said in a note. "It does not solve the fundamental fiscal problems but it gives countries now several years."
Not only are there a lot of moving parts to finding out which countries need aid, market pros are wondering where the money's going to come from and how they're going to get countries with spending problems to adhere to austerity measures.
"This is the effect of a trillion dollar injection," Michael Farr, president of Farr, Miller & Washington, said in his blog on CNBC.com of today's euphoric market reaction. "It represents new debt and commitments to support governments that have not lived within their means."
Sovereign debt problems have consumed the market in recent weeks, with Wall Street even shrugging off a solid jobs report last week. But some market pros pointed out the economy will also play a part in cutting off this rally.
"With a 9.9 percent unemployment rate, you need job creation even more than what we got on Friday," Richard Suttmeier, chief market strategist at ValuEngine.com and Niagara International Capital, told CNBC on Monday. "We're just going through a few more months where we may see this job creation. But once we get into the second half of the year, there's going to a disappointing lack of job creation given the uncertainties that are around the world."