Stocks spike as Greek referendum prospects fade

Stocks rose sharply Thursday amid mounting expectations that a Greek referendum on a European bailout plan will be abandoned and a surprise rate cut from the European Central Bank.
In Athens, Greek Prime Minister George Papandreou came under intense pressure from his own party and opposition lawmakers to resign and let a coalition government approve a European bailout plan instead of holding a risky referendum on it.
Papandreou's unexpected announcement Monday that he intended to put the hard-fought bailout package to a referendum horrified Greece's international partners and creditors, triggering turmoil in financial markets as investors fretted over the prospect of a disorderly default and the country's exit from the 17-nation eurozone.
"Markets have rallied .... on the expectation that the referendum will be cancelled," said Louise Cooper, markets analyst at BGC Partners.
In Europe, Britain's FTSE 100 was up 1.1 percent at 5,546. France's CAC-40 rose 3 percent 3,204 while Germany's DAX was also 3 percent higher at 6,144.
In the U.S., the Dow Jones industrial average rose 1.2 percent, to 11,974 while the broader S&P 500 index rose 1 percent to 1,251.
Despite Thursday's recovery, markets remain jittery about how Europe will resolve its debt crisis, especially now that it's been openly admitted that a country can actually leave the euro.
This week's instability in Greece has sent immediate ripples throughout Europe. Premier Silvio Berlusconi's government in Italy was teetering as well after it failed to come up with a credible plan to deal with its dangerously high debts, and Portugal demanded more flexible terms for its own bailout.
Markets were thrown into turmoil on Monday after Papandreou's referendum proposal. It horrified Greece's international partners and creditors, triggering market worries that Greece may default on its debts and exit the eurozone.
This week's turmoil was also a clear factor in the European Central Bank's surprise decision Thursday to cut interest rates by a quarter of a percentage point to 1.25 percent. That helped shore up stock markets too.
The move, which comes earlier than expected by many economists, takes the bank's benchmark rate to 1.25 percent.
European growth is expected to slow to near or below zero in the last three months of the year.
Uncertainty from Europe's debt crisis is a factor. Business and consumers are reluctant to spend and investors because they fear more financial turmoil if Greece defaults on its debts.
The euro suffered a bout of selling after Draghi signaled that the ECB's bond purchases, which have been keeping down borrowing rates for financially weak countries like Italy, are temporary and limited.
However, the retreat was short-lived as investors breathed a sigh of relief over the apparent scrapping of the referendum pledge. The euro was up 0.6 percent at $1.3771.
Though Greece's political developments were the main point of interest in the markets, investors are keeping a close watch on the French resort of Cannes where the Group of 20 leaders from the industrial and developing world are meeting.
In Cannes, President Barack Obama pledged world leaders would flesh out details of a plan to resolve the European financial crisis.
Earlier in Asia, Hong Kong's Hang Seng retreated 2.5 percent to close at 19,242.50. South Korea's Kospi lost 1.5 percent to 1,869.96 and Australia's S&P/ASX 200 shed 0.3 percent to 4,171.80.
Japanese markets were closed for a national holiday. Mainland Chinese shares rose, with the benchmark Shanghai Composite Index gaining 0.2 percent to 2,508.09.
Benchmark crude for December delivery was up $1.16 at $92.67 a barrel in electronic trading on the New York Mercantile Exchange.
Pam Sampson contributed from Bangkok.