Stocks rally on news two big Greek banks are to merge

STOCKS RALLIED yesterday along with oil after a merger between two major banks in Greece gave investors a rare bit of encouraging news out of Europe.

Greek equities jumped 14 per cent and its banking shares alone surged 29 per cent as the merger shrank the number of weak banks in the euro zone, reducing the chance of calls on the region’s Financial Stability Fund for recapitalisation.

The participation of the Qatar Investment Authority in the tie-up between Eurobank and Alpha Bank – the second and third largest banks in Greece – also showed that some foreign investors were beginning to see European assets as undervalued.

The deal creates the largest bank in southeastern Europe.

“We’ll probably need to see greater policy action in the region, but the merger needs to be done and that’s why we’re seeing a pause in the recent selling pressure,” said David Ruff, portfolio manager at the Forward Select EM Dividend Fund in San Francisco.

An unexpected surge in US consumer spending for July – it indicated the economy was not falling back into recession – further boosted sentiment across global markets.

Trading volume around the world was low, with London closed for a holiday and Wall Street recovering from Hurricane Irene. Light volume exacerbates stock moves, making them bigger or smaller than normal.

By mid-afternoon Wall Street’s Dow Jones industrial average was up 220.08 points, or 1.95 per cent, at 11,504.62.

The Standard Poor’s 500 Index was up 27.93 points, or 2.37 per cent, at 1,204.73.

The Nasdaq Composite Index was up 67.72 points, or 2.73 per cent, at 2,547.57.

Even after the run higher, Greek banking shares are still down nearly 50 per cent year-to-date, troubled by rating downgrades, deposit outflows and loan impairments in the wake of the country’s worst recession in four decades. Yesterday’s merger sent stocks of Eurobank and Alpha up 30 per cent each.

Aside from banking stocks, shares of US insurers were also up on Wall Street due to less-than-feared property damage from the weekend storm.

Treasuries prices fell as investors turned to stocks.

The benchmark 10-year US Treasury note was down 22/32, with the yield at 2.27 per cent.

The dollar was 0.2 per cent lower against a basket of major currencies.