A move by the world’s central banks to lower the cost of borrowing exhilarated investors Wednesday, sending the Dow Jones industrial average soaring 490 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.
It was the Dow’s biggest gain since March 2009 and the seventh-largest of all time.
Large U.S. banks were among the top performers, jumping as much as 11 percent. Markets in Europe surged too, with Germany’s DAX index climbing 5 percent.
“The central banks of the world have resolved that there will not be a liquidity shortage,” said David Kotok, chairman and chief investment officer of Cumberland Advisors. “And they have learned their lessons from 2008. They don’t want to take small steps and do anything incrementally but make a big, bold move that is credible.”
Wednesday’s action by the banks of Europe, the U.S., Britain, Canada, Japan and Switzerland represented an extraordinary coordinated effort.
But amid the market’s excitement, many doubts loomed. Some analysts cautioned that the banks did nothing to provide a permanent fix to the problems facing heavily indebted European nations such as Italy and Greece. It only buys time for political leaders.
“It is a short-term solution,” said Jack Ablin, chief investment officer at Harris Private Bank. “The bottom line on any central-bank action is that it papers over the problems, buys time and in some respects takes pressure from politicians. . . . If nothing’s done in a week, this market gain will disappear.”
Bank stocks soared as fears about an imminent disaster in the European financial system ebbed. JPMorgan Chase jumped 8.4 percent, the most of the 30 Dow components. Morgan Stanley rose 11.1 percent and Citigroup 8.9 percent.
In response to the new rates, the euro rose sharply, while U.S. Treasury prices fell as demand weakened for ultra-safe assets.
The Dow rose 4.2 percent to close at 12,045.68. It has more than gained back the 564-point slump it had last week.
What happened
Stocks surged Wednesday after the world’s leading central banks acted to reduce banks’ borrowing costs.
WHY IT MATTERS
Markets have been rattled by concerns about banks that hold large amounts of debt issued by European governments. Many fear that a default by a European country could topple one or more banks.
MARKET IMPACT
The Dow Jones industrial average’s leap of 490 points was its biggest since March 23, 2009 — when stocks started rising from 12-year lows. The S&P 500 and Nasdaq also gained more than 4 percent.
