Dow: 13,292 (+1.87%) S&P 500: 1,432 (+2.04%)
The MarketSnacks team thought that this week was about Amurica. The Giants and Cowboys beat each other up last night to open the NFL season and Bill “Bubba” Clinton prodded his thumb toward the camera like we haven’t seen since those amazing Darrell Hammond impersonations on Saturday Night Live. Tonight President Obama makes a huge speech and tomorrow’s official August government jobs report will define political talking points going into the election….but today the European Central Bank rocked the world into a stock-buying jubilee by announcing a program to purchase an unlimited amount of government bonds to support the struggling PIIGS countries in Europe. Coupled with a surprising ADP jobs report that previews tomorrow’s government version, banking stocks soared and materials stocks roared while the S&P 500 hit 4-year highs and the Dow climbed 245 points.
European Central Bank expands role to “Lender of Last Resort” for struggling governments
Depressed investors had all but lost hope in Europe’s ability to end the debt crisis. There are just too many conflicting interests and not enough unity in the mishmash of the Eurozone to come together and find a real solution…For 3 years the crisis has been going on and attempts to resolve it have only led to Greek politicians slapping each other on live TV and Spanish banks urging customers not to have sex in their parents’ cars. Today’s news was different – it was huge. The ECB unveiled an aggressive bond buying program to lower the borrowing costs of struggling countries and to assure private investors that they would not default on their debt.
Central Banks have vaults, but they’re secondary to printing presses as the source of a country’s money. In America the Federal Reserve Bank can always print cash in order to buy US gov’t bonds (“Treasuries”) to finance the debt. Look at a $1 bill in your pocket – Federal Reserve Note is right at the top. This can be dangerous because printing money can cause inflation by diluting the value of all the other dollars out there, but this role of “lender of last resort” is crucial to keep a currency strong. Europe’s different – The ECB wasn’t supposed to be a lender of last resort because it’s unfair for the cash in the hand of a German to lose value after the ECB prints a billion euros to bailout Greece. This wasn’t the ECB’s role…until now.
The ECB announced it would buy unlimited amounts of gov’t bonds in order to keep borrowing costs down. Now Spain can ask the ECB for help and the ECB will print a ton of cash to buy Spanish bonds, which increases the demand and lowers the amount of interest Spain needs to pay to borrow money – so a struggling country can finance itself in the crucial European bond market. There are strings attached, though: If a country asks the ECB to pay for their bonds, it must accept strict budget rules & some austerity measures. Although the ECB says it prevent inflation by removing cash from the economy to offset any cash injected with bond purchases, the Germans are skeptical (It looks like the ECB is coddling weak euro governments). But the big announcement makes the EU more like normal countries with their own currencies and reduces doubt that the euro will disappear. Spanish & Italian stock markets spiked up over 4% each now that they can hold out tin cans to the ECB.
ADP reports 201,000 jobs added in August
Payroll-tracking company ADP announced that private-sector jobs rose by 201,000 in August, much more than economists expected – and they revised July’s number higher. The ADP report is considered a solid appetizer to the upcoming official government employment report to be released tomorrow. Keep in mind that ADP may not be the most consistent analysis (they’ve overestimated growth by 77,000 jobs on average since March) – but investors still consider it helpful to set expectations for the major Labor Department announcement.
- The one big monthly data report we’ve all been waiting for: The Labor Department’s Non-Farm Payrolls & Unemployment Rate for August…
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