Stocks gain on ECB pledge and US growth Figures

European markets erased earlier losses and climbed steadily higher after midday on Friday thanks to a newspaper report that the European Central Bank is preparing to buy Spanish and Italian government debt and better than expected US growth.

Any initial sell off was soon reversed adding to the strong rally from the previous session, which saw the FTSE close up 1.4%.Heading into the close today the FTSE had added a further 0.88%, the DAX over 1% and the CAC 1.9%.

The jump in the markets yesterday was thanks to ECB President Draghi pledging “to do whatever it takes to preserve the euro”. Today, the European stock markets rallied strongly as the statement from Draghi seemed to be supported by a report in French newspaper that the European Central Bank and Eurozone governments are preparing to buy Spanish and Italian debt.

As more details emerged as to the manner with which the ECB intended to carry out its plan, scepticism over the pledge from Draghi has faded. Investors showed their confidence in the plan by buying into Spanish and Italian debt bringing the 10 year government bond interest rates down 14 basis points for Italy to 5.92% and 23 basis points for Spain to 6.67%, providing a much welcomed breathing space for the respective Governments.

However there is a possibility that this is just another knee jerk reaction from investors who are desperate for some positive news for the Eurozone. On further digestion and analyses of the plan it may become obvious that there are still many hurdles to overcome. Sentiment from the German Bundesbank this morning to state that ‘buying bonds would set the wrong incentive and that giving the bailout fund a banking license would be fatal and prohibited by European Treaties’ is an example of just how difficult Draghi will find it to turn rhetoric into action.

Across the Atlantic US GDP grew at 1.5% quarterly annualised pace in quarter 2, slightly better than expected but expectation had been downwardly revised several times throughout the quarter. The slack economy and falling fuel prices kept inflation steady and therefore has given the Federal Reserve more room for another round of stimulus should it be deemed necessary. Investors constantly speculating if and or when QE3 will arrive will see these figures as another green light and this further supported the rally in the markets.

Companies continued to reported earnings thick and fast and Barclays delighted shareholders by reporting a stronger than expected set of earnings. The bank, continually under PR fire for the libor manipulation scandal, reported pre tax profits had increased 13% to £4.2bn for the first half of the year, beating forecasts of £3.8bn. That was enough to lift the banks share prices over 4% straight to the top of the FTSE leader board.