Why ‘Good News’ From Eurozone, ECB Cheered the Markets

Since late Tuesday, global risk assets like U.S. stocks and high-yielding currency have surged against safe havens like the U.S. dollar.

From Tuesday's low, the S&P 500 Index has climbed 8.5 percent, the Dow Jones Industrial Average has rallied 7.5 percent, and the Nasdaq 100 has risen 8.2 percent.

The reason? Mostly good news out of Eurozone officials and the European Central Bank (ECB).

The Financial Times reported on Tuesday that Eurozone authorities are discussing ways to recapitalize European banks and the ECB announced on Thursday that it will reintroduce year-long loans to banks.

These measures, however, are band-aid solutions that don't address the core issue of the European debt crisis, which are imbalances between core and peripheral Europe and the indebtedness of peripheral Europe.

Still, the markets surged because the measures will likely stave off a European banking collapse.

In analyzing the behavior of the markets, it's crucial to know why they're trading at their levels.

Prior to Tuesday's afternoon session, U.S. stocks were getting hammered. On Tuesday morning, the S&P 500 plunged to 1,074, which is more than 20 percent off the May 2 intra-day high and took the index into bear market territory.

The stock market's freefall was driven by the fear of a Lehman-style European banking crisis. Analysts have long-noted that European banks are undercapitalized and vulnerable. Losses from Greek bonds, therefore, could have caused a wave of European bank failures.

Prior to Tuesday, Eurozone authorities were mum on any aid measures, which fueled investors' fears that they may actually stand and watch a crisis unfold before they finally step in.

After Tuesday, such fears were calmed and the market began to climb to pre-European banking meltdown fear levels.

The rally, however, may not last long.

While an imminent European banking meltdown was averted, the European debt crisis has not been resolved. It's very possible that another shoe may drop in the debt crisis and stoke renewed fears of a banking meltdown.

For now, though, global risk assets have received some much needed breathing room.

E-mail Hao Li at hao.li@ibtimes.com.

For more useful global markets information, visit ibtimes.com/sections/global-markets.