Has Santa Claus settled in on Wall Street? Certainly today optimism from Goldman Sachs outweighed the euro crisis

12/02/2010 3:47 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

For the day Goldman Sachs and strong U.S. retail sales and housing numbers trumped disappointment over a tepid response to the euro debt crisis from the European Central Bank.

This morning Goldman Sachs raised its rating on U.S. financial stocks to overweight and predicted a 20% rally in the Standard & Poor’s 500 stock index by the end of 2011. Same store retail sales grew by 5.3% in November, way above the 3.5% expected. Pending home sales soared by a record 10%.

For the day the big European indexes, the FTSE in the United Kingdom, the DAX in Germany, and the CAC in France finished up 2.2%, 1.3%, and 2.1% respectively.

In the United States the Dow Jones Industrials were up 0.98% and the Standard & Poor’s 500 1.3% as of 3:30 New York time.

Quite a turnaround from what started as a rather dour day.

At a Frankfurt press conference that began at 2:30 local time (equivalent to 8:30 a.m. New York Time) European Central Bank President Jean-Claude Trichet disappointed financial markets that had hoped for news of a big increase in government bond purchases from the Euro Zone’s central bank.

The euro, which had traded as high as $1.3217 before Trichet spoke dropped to $1.3085 shorting after he talked.

Today’s meeting of the 22-member governing council of the bank did signal that the bank will not begin to end its emergency policies of buying government debt and extending credit to troubled banks at the beginning of 2011 as some members of the council had advocated. The bank will continue those emergency policies “with full allotment as along as needed, and at least until April 12,” Trichet said. The central bank also left its benchmark interest rate at a record low of 1%.

But financial markets had hoped for more—and yesterday’s huge rally had anticipated more. Speculation raged that after the Irish “rescue” plan failed to stop the euro crisis from spreading to Portugal, Spain Italy, and Belgium the bank would announce a big increase in bond buying—something like the Federal Reserve’s $600 billion QE2 program of quantitative easing scheduled to run through June.

The bank wasn’t willing to go that far. Yet.

Which leaves national governments in Portugal, Spain, and Italy pretty much alone in their fight to convince the bond market that they won’t require a rescue package. Given the weak political position of each of those governments—it’s a day-to-day question if they can scrape up a majority for any vote on budget cuts or new taxes—that’s a lot to ask.

For one day, at least, the markets were willing to look past that problem.

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