Stocks closed sharply higher after a wild final hour of trading Thursday following a report that central banks are preparing coordinated action to provide liquidity after the Greek election.
The day’s rally was initially fueled by hopes that the Federal Reserve might come up with another round of stimulus on the heels of some weak economic reports.
A senior U.S. official cautioned that the Greek election will not provide "the definitive signal on what happens next" in the euro zone debt crisis, according to Reuters. But if severe market strains emerge after the elections, central bankers will be ready to ensure enough cash is flowing throughthe financial system.
“The central banks are worried about bank runs because if Syriza wins on Sunday, you could see [more] bank runs in Greece and there’s fear that maybe we can get some in the peripheral countries,” said Peter Boockvar, equity strategist at Miller Tabak. “But this reminds me of the magic candle—you blow it out, but it flares up again. It goes out only temporarily.”
The Dow Jones Industrial Average rallied 155.53 points, or 1.24 percent, to close at 12,651.91, led by Home Depot and Travelers . The blue-chip index initially surged 200 points following the central bank report.
The S&P 500 jumped 14.22 points, or 1.08 percent, to end at 1,329.10. The Nasdaq gained 17.72 points, or 0.63 percent, to finish at 2,836.33.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, closed below 22.
All 10 S&P sectors closed in positive territory, led by telecoms and energy.
Reuters also reported that an emergency G7 meeting may be held in Mexico early next week.
Shortly following the report, finance minister George Osborne said Britain's government and the Bank of England will act together with new monetary tools to protect the UK from the financial crisis.
Most traders and investors have been hesitant to make big commitments ahead of Greece's elections on Sunday, which could lead to the debt-ridden nation's exit from the euro zone. Meanwhile, Egan-Jones downgraded France's credit rating to "BBB+" from "A-" with a negative outlook, a day after the agency cut Spain to "CCC+" from "B."
Adding to woes, Moody's cut its rating on Spanish government debtby three notches after the close Wednesday. The round of downgrades put pressure on Spanish bond yields as investorssought greater reassurance to hold government debt. The yield on Spain’s 10- year government bond hit 7 percent for the first time following the downgrade.
Italian bond yields also came under pressure, pushing the country's three-year borrowing cost to above 5.30 percent in an auction. Traders have been speculating that Italy may be the next shoe to drop.
The Fed holds a two-day monetary policy meeting next week, with chairman Bernanke expected to hold a news conference at the end of the meeting Wednesday afternoon.
“Yesterday’s PPI and today’s CPI numbers were both more deflationary than expected—this frees up the FOMC voters who might be prone to an easing policy and it justifies what they might have to do next week,” said Stephen Guilfoyle, trader at Meridian Equity Partners.
Natural gas futures spiked to log its best day in almost two years after a government data showed a smaller-than-expected weekly inventory build. Nat gas prices have been under pressure for most of the year amid worries over a supply glut and an unusually warmer winter and spring in the U.S. Shares of Cabot Oil & Gas , EQT and Apache all rallied.
Sunoco is closing in on a dealto sell its Philadelphia refinery to Carlyle Group
Also on the M&A front, Quest jumped after the software manufacturer said a potential bidder proposed to buy the company for about $2.15 billion, outbidding an earlier offer of nearly $2 billion by a private investment firm.
Among earnings, Kroger rallied after the supermarket chain topped earnings. But Smithfield Foods slumped after the meat processor reported weaker-than-expected results, due to lower margins in its fresh pork business and lackluster sales.
International Game Technology surged to lead the S&P 500 gainers after the slot-machine maker announced a stock repurchase program of up to $1 billion.
Nokia plummeted after the Finnish cellphone maker said it plans to cut another 10,000 jobs globally and also warned that the second-quarterly loss would be larger than expected. In addition, Baird downgraded Nokia to "underperform" from "neutral."
On the economic front, weekly jobless claims unexpectedly rose 6,000to a seasonally adjusted 386,000 last week, according to the Labor Department, in an ongoing sign of weakness in the employment market.
Meanwhile, consumer prices dipped 0.3 percent in May, falling the most in over three years, according to the Labor Department. And the current account deficit widened more than expected to $137.3 billion in the first quarter, the largest gap since the end of 2008.
The government auctioned $13 billion in 30-year bonds at a high yield of 2.720 percent and bid-to-cover of 2.40.
—By CNBC’s JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
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