Source: The Canadian Press

Stock markets closed sharply higher Monday as investors breathed a collective sigh of relief that the European Union is taking aggressive action to protect the euro currency and deal with a severe government debt crisis.

The S&P/TSX composite index jumped 255.47 points to 11,947.9 after the European Union and the International Monetary Fund pledged to make nearly US$1 trillion available in loans if needed to defend the currency and the eurozone.

New York’s Dow Jones industrial average ran up 404.71 points to 10,785.14 as the European Central Bank also announced it would intervene in bond markets as part of the wider effort to snuff out the continent’s debt crisis.

However, analysts warned that although the moves are good news, it doesn’t mean the problem that started out as a Greek debt crisis and morphed into wider worries about government default has gone away.

“It was nice to wake up this morning and see what the eurozone has done because they have actually helped alleviate some of those worries, but it’s still a problem that needs to be dealt with,” said Phillip Petursson, director of institutional equities at MFC Global Investment Management.

“I say we’re only in the second act of this Greek tragedy, with the third act to go.”

The moves by the European Union also pushed the Canadian dollar and the euro, as well as commodity prices, sharply higher after investors had piled into the perceived safe haven of the U.S. dollar over the last few weeks.

The loonie surged 1.83 cents to 97.63 cents US after going as low as 93.02 cents last Thursday. The euro traded at US$1.2775 after shooting up to US$1.30, a big improvement from the 14-month intraday low of $1.2523 on Friday.

The TSX energy sector moved up 2.77% as the June crude contract on the New York Mercantile Exchange advanced $1.69 to US$76.80 a barrel. Demand worries had also pushed crude prices down more than US$10 a barrel last week. On the TSX, Suncor Energy gained 72 cents to C$32.64 and Canadian Natural Resources (TSX:CNQ) was ahead $1.98 at C$73.98. Copper prices also rebounded with the July contract ahead eight cents to US$3.23 a pound. The base metals sector advanced 6.47% and Teck Resources (TSX:TCK.B) bounded ahead $3.19 to C$39.53 while Equinox Minerals (TSX:EQN) was up 24 cents at C$3.84.

Many commodities are sold in U.S. dollars and a decline in the value of the greenback tends to drive up prices.

The financial sector was also stronger, up 2.28% after bank stocks fell back last week on fears the growing government debt crisis could spark a freeze in credit markets similar to what happened in the fall of 2008. Royal Bank (TSX:RY) was ahead $1.18 at $60.10 and TD Bank (TSX:TD) improved by $1.85 to $73.77.

Railway stocks also made headway following severe losses last week alongside falling commodity prices. Canadian National Railways (TSX:CNR) advanced $2.57 to $60.73 and Canadian Pacific (TSX:CP) ran ahead $2.80 to $59.25.

Gold prices had also shot higher because of investor nervousness. But on Monday the June bullion contract on the Nymex was down $9.60 to US$1,200.80 an ounce. Still, the TSX global gold sector was higher and Centerra Gold (TSX:CG) added 36 cents to C$12.24.

The TSX Venture Exchange gained 41.41 points to 1,590.76.

Elsewhere in New York, the Nasdaq composite index moved 109.03 points higher to 2,374.67, while the S&P 500 index gained 48.85 points to 1,159.73.

Meanwhile, central banks, including the Bank of Canada and the U.S. Federal Reserve, have reopened their dollar swap operations, in which they offer billions of dollars overseas to boost banks’ cash positions in return for foreign currency. The Bank of England, the ECB, the Bank of Japan and the Swiss National Bank are also involved in the effort.

The good news from Europe came after markets fell heavily last week on worries that the debt crisis would spread from Greece to other countries with unsustainably high debt levels such as Spain and Portugal.

But gains on the Toronto market Monday made up just half of last week’s 4% slide on the TSX and Petursson added that it would be a mistake to interpret the day’s gains to the start of a new leg up in a stock market rally that has been stalled for weeks.