European stocks stage tentative recovery

Thu Aug 11, 2011 5:07am EDT

* FTSEurofirst 300 up 2 pct, Euro STOXX 50 up 2.8 pct

* Societe Generale bounces back 8 pct as CEO denies rumours

* Peripherals helped by ECB buying bonds again

* Double bottom needed to confirm indexes' rally -TradingSat

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By Blaise Robinson

PARIS, Aug 11 (Reuters) - European stocks rose on Thursday morning, recovering from a 20 percent plunge over the past 3 weeks, with reassuring comments from Societe Generale's CEO sending the stock up 8 percent.

Euro zone's peripheral stocks featured among the top gainers, with Italy's FTSE MIB up 3.5 percent and Spain's IBEX up 3.4 percent, as the European Central Bank was seen buying Italian and Spanish government bonds again, easing jitters over the two countries' ability to deal with their debt problems.

At 0838 GMT, the FTSEurofirst 300 index of top European shares was up 2 percent at 929.20 points after tumbling 4 percent to a two-year closing low on Wednesday.

The euro zone's blue chip Euro STOXX 50 index was up 2.8 percent at 2,214.66 points.

"We're getting more and more signals pointing to the formation of a temporary low, with momentum indicators pointing to "oversold" levels and strong gaps between prices and 50-day and 200-day moving averages," said Alexandre Le Drogoff, technical analyst at Aurel BGC.

Before Thursday's rebound, the Euro STOXX 50 index was deep in oversold territory with its 14-day relative strength index , a widely used momentum indicator, at 14.8, the index's lowest RSI since early 2008 during the heat of the financial crisis. Thirty and below is considered oversold.

But Vincent Ganne, chartist at TradingSat, said being strongly oversold is not enough to trigger a rebound and indexes need to form a double-bottom pattern figure before starting a recovery rally.

"Today's rebound is mostly due to the banking sector recovering after yesterday's crazy session. If the lows of the week are not pierced again, there is a chance of a rebound, but we need a double-bottom to get a clear signal," he said.

"Have we seen capitulation yet? Has the sell-off reached its paroxysm? It's not clear at this point. We're also getting paradoxical signals from the fixed income market, with CDS prices on the rise while yields are falling."

Shares in Societe Generale rose 8 percent, bouncing back from 15 percent nosedive on Wednesday, after the bank's Chief Executive Frederic Oudea late on Wednesday dismissed rumours of liquidity problems as "absolutely rubbish".

Other banks were on the rise, with Credit Agricole up 7.4 percent, Commerzbank up 6 percent and Credit Suisse up 5.7 percent.

Renewed efforts by France to further trim its deficit also helped lift investors' mood. French President Nicolas Sarkozy on Wednesday ordered his finance and budget ministers to find new ways to slash the public deficit and calm investors' fears over the country's triple-A rating.

Around Europe, UK's FTSE 100 index was up 2 percent, Germany's DAX index up 2.9 percent, and France's CAC 40 up 2.4 percent.

But the rebound remains fragile, with the 50-day moving average of the DAX breaking below its 200-day moving average -- a bearish technical signal known as "dead cross".

Strategists at Goldman Sachs said that while valuation alone is rarely enough to turn markets, tentative signs of more fundamental support were emerging.

"The ECB has started to buy Italian and Spanish debt pushing down spreads, and post the FOMC comments its economists' base case scenario now includes more QE later this year or in early 2012," Goldman Sachs equity strategists said in a note.

The strategists said that post the recent fall in market prices, the gap between the dividend yield and real bond yield has widened to more than 4 percent, close to the record high reached in early 2009, while the equity risk premium implied by current market prices is 7.9 percent on its estimates, higher than in March 2009 and circa 110 basis points higher than their macro model would suggest.

(Reporting by Blaise Robinson; additional reporting by Jon Hopkins and Dominic Lau in London; Editing by Andrew Callus)

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