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Wall Street charged higher on Wednesday as traders reacted to a deluge of economic news and developments on Europe's sovereign debt crisis, but the rally only put a relatively small dent in the heavy losses sustained earlier in the week.
Financial shares, as well as energy and material stocks, were leading the way higher on the day. Indeed, Bank of America (BAC), aluminum giant Alcoa (AA) were the best performing shares on the blue-chip index.
Meanwhile, volatility fell 4% in stark contrast to the 17% spike the day before. Still, the Dow is roughly 400 points to the downside this week, and there could be more volatility in the final two days as the focus turns to unemployment data and the Group of 20 summit.
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Among the key developments of the day were a slew of headlines from the Federal Reserve, which concluded its two-day monetary policy meeting on Wednesday.
The central bank said while the economy has improved, the beleaguered labor market will only gradually strengthen, and downside risks such as "strains in the global financial markets" could pose a problem going forward. It held short-term rates at historic lows as was expected per a prior statement and didn't roll out any additional quantitative easing measures, also in line with expectations. However, during a press briefing, Fed Chairman Ben Bernanke said the central banks stands ready to take more measures to aid the economy, which was interpreted by some analysts as hinting at the possibility of more expanded asset purchases like the quantitative easing program, called QE2, that ended in June.
"The QE3 groundwork has now officially been laid with the timing the only issue assuming [the housing market] doesn't recover anytime soon," Peter Boockvar, managing director at Miller Tabak + Co. wrote in a note to clients following the briefing.
The Fed also pared back its economic growth forecasts for 2011 and 2012, and said also said it expects the unemployment rate to remain higher than previously expected. For this year, the central bank expects expansion of 1.6% to1.7% from 2.7% to 2.9%, and revised its growth expectations for next year to 2.5% to 2.9% from 3.3% to 3.7%. It expects unemployment to remain above 9% for the rest of this year, and recede as low as 7.8% or as high as 8.2% next year.
Labor Market in Focus
The labor market is coming into focus ahead of the highly-anticipated monthly unemployment report on Friday. The jobs market has been struggling ever since the recession, with the unemployment rate presently stuck above 9%.
Private-sector payrolls increased by 110,000 last month, zipping by economists' estimates of a gain of 101,000 jobs. As has been a trend in recent reports, small and medium-sized businesses have added jobs, while large ones shed workers.
"Job growth among private industries has recovered since August, reflecting slow but steady growth," economists at Nomura wrote in a note to clients.
Planned job cuts fell 63% last month to 42,759 -- the lowest since June -- according to outplacement firm Challenger, Gray & Christmas.
Continued Uncertainty Over the Euro Zone
Market participants have been fixated on the two-year-old sovereign debt crisis for weeks.
Less than a week after European leaders struck a wide-ranging agreement to tackle the crisis that analysts fear could put the region's economy in peril, a call by Greek Prime Minister George Papandreou to hold a referendum threatened to derail the entire arrangement, and potentially put the currency bloc in jeopardy. Greece needs billions of euros in rescue aid to stave off a collapse, but international lenders have pushed for highly-unpopular austerity measures, which would be voted on by the entire Greek public in the referendum.
It remained unclear Wednesday whether the referendum would come to fruition. The country's cabinet unanimously backed the call, but many lawmakers rejected it, and several members of Papandreou's own party threatened to defect. The fear is that if Greece defaults, the cost for other highly indebted but bigger economies, like Italy, to borrow will jump, substantially worsening the crisis.
Indeed, the European Union and International Monetary Fund both said on Wednesday they would withhold the country's sixth aid tranche until after the referendum. Without the aid, Greece can't pay its debts and would likely default, analysts say.
The euro rose 0.46% against the U.S. dollar, while European blue chips ticked higher by 0.1%.
Energy markets got a boost from a weaker U.S. dollar, and extended gains even after a fairly bearish inventory reports showing unexpectedly large increases in crude oil and gasoline stocks. The benchmark U.S. crude oil contract rose 32 cents, or 1%, to $92.51 a barrel. Wholesale RBOB gasoline rose less than a penny to $2.63 a gallon.
Gold climbed $17.80, or 1%, to $1,730 a troy ounce. Yields on U.S. government debt were only modestly changed following steep losses the prior day. The 10-year Treasury yields 1.998% from 1.992%.
European blue chips rallied 1.4%, the English FTSE 100 jumped 1.2% to 5,484 and the German DAX soared 2.3% to 5,965.
In Asia, the Japanese Nikkei 225 tumbled 2.2% to 8,640 and the Chinese Hang Seng jumped 1.9% to 19,734.