World markets up on welcome Greek bank deal

Better-than-expected US consumer spending and a deal to merge two top Greek banks helped bolster investor optimism at the start of the week, both in Europe and on Wall Street.

In late trading, the Dow Jones industrial average climbed 2.12 per cent, the Standard & Poor's 500 Index rose 2.53 per cent and the Nasdaq Composite Index advanced 2.97 per cent.

Across the pond, the Stoxx Europe 600 Index closed with a 1.2 per cent gain. In Greece, the benchmark ASE Index posted its best day in more than two decades, ending the day with a 14 per cent jump. London was closed for a bank holiday.

Investors applauded the announcement that two Greek banks Alpha and EFG Eurobank, the nation's second- and third-largest respectively, agreed to merge, a concrete step toward a restructuring of the financial system in the fiscally beleaguered nation.

The banks "need to strengthen their balance sheets, and this would help with that, making the sector less worrisome," David Ruff, portfolio manager at the Forward Select EM Dividend Fund in San Francisco, told Reuters.

"We'll probably need to see greater policy action in the region, but the merger needs to be done and that's why we're seeing a pause in the recent selling pressure."

The merger news helped pace Greek stocks overall to their biggest one-day gain in more than two decades.

Eurobank and Alpha Bank each jumped by the allowed daily limit of 30 per cent after saying they will combine and sell new equity to strengthen their capital in an attempt to weather the debt crisis.

Larger rival National Bank of Greece SA gained the most on record while Piraeus Bank SA had the steepest advance in almost 18 years, according to Bloomberg data.

Also helping was a clear sign that the American consumers are loosening their purse strings as consumer spending posted its biggest jump in five months in July.

Purchases increased 0.8 per cent, the most since February, after a 0.1 per cent fall the prior month, according to Commerce Department figures. The median estimate of 74 economists surveyed by Bloomberg News called for a 0.5 per cent increase. Incomes grew 0.3 per cent, pushing the savings rate to a four-month low.

Meanwhile, President Barack Obama revealed that he had chosen Princeton economist Alan Krueger as the new chief of the Council of Economic Advisers, saying Krueger will play a central role in bolstering economic expansion.

"Our great ongoing challenge as a nation remains how to get this economy growing faster," Obama said at the White House, Bloomberg reported. "Our challenge is to create a climate where more businesses can post job listings, where folks can find good work that relieves the financial burden they're feeling, where families can regain a sense of economic security."

The decision to tap Krueger comes a week before Obama is to outline a fresh plan to kickstart jobs hiring in the world's biggest economy.

The to-date economic sluggishness has hurt stocks, now cheap on a historical basis. The Standard & Poor's 500 Index has lost 13 per cent in the past five weeks, sending its price-earnings ratio down to 12.9, according to Bloomberg. That's 3.5 per cent less than the average multiple during the 10 economic contractions since 1949 and a level last reached in 1982, according to data compiled by Bloomberg.