Stocks soar as central banks act to ease market strains

— -- Stocks soared Wednesday after central banks around the world agreed to pump more liquidity into European banks, an effort designed to loosen credit and stimulate economic growth.

The Dow Jones industrial average was up nearly 400 points or 3.4% in afternoon trading, following sharp gains of 3% to more than 4% on European exchanges. The gains in the USA, mirrored by the Standard & Poors 500 and Nasdaq composite index, all but erased last week's losses on Wall Street.

Wednesday's rally was burnished by some bright U.S. economic news: October sales of existing homes surged 10.4%. A separate report found private employers added 206,000 jobs in November - nearly 60% above some analysts' expectations - for the biggest gain since December 2010. And China boosted global markets by cutting reserve requirements for its banks, to ease lending and keep that economy humming.

But the primer igniting Wednesday's stock gains was the coordinated move by the Federal Reserve, the European Central Bank and other central banks to reduce the cost of short-term dollar loans to banks, called liquidity swaps, by a half percentage point starting next Monday.

The problem was most acute in Europe, which is grappling with the issue of massive debt in many countries.

The central banks' effort is aimed at easing strains on financial markets and making it easier for consumers and businesses to access credit.

The move doesn't solve Europe's continuing debt crisis, but could mitigate a credit crunch by making it easier for banks to get and lend money.

Fears of deeper financial turmoil in Europe have already left some European banks dependent on central bank loans to fund their daily operations. Commercial banks are wary of lending to them for fear of not getting paid back. Such constraints on interbank lending can hurt the wider economy by making less money available to lend to businesses.

Investors, hopeful that the central bank actions could avert a recession in Europe that would derail a shaky U.S. economy, applauded the move.

"This is a step toward easing some of the fear factors over a potential freezing of credit in Europe,'' says Peter Cardillo of Rockwell Global Capital.

But others noted that the central banks' move does little to resolve the debt problems at the heart of the matter.

"Europe is still in crisis containment mode, not crisis resolution mode,'' says Samy Muaddi, a vice president at T. Rowe Price. "It's just a marginal step forward. We still have the same concerns we did yesterday."

The central banks' effort "is not a game changer,'' says John Higgins, a senior markets economist at London-based Capital Economics, who notes that demand for dollar finding in the Eurozone is "symptomatic of a broader liquidity squeeze."

Eurozone finance minsters have scheduled an EU summit next week in an effort to

The coordinated effort central bank effort contrasts with the indecision of Eurozone's finance ministers, who have been unable to agree on a consensus to solve fiscal woes as they head into next week's EU summit.

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," says EU Monetary Affairs Commissioner Olli Rehn. "There is one single silver bullet that will get us out of this crisis."