European shares surge on debt crisis action optimism

Mon Nov 28, 2011 1:31pm EST

* FTSEurofirst 300 ends up 3.6 pct, biggest 1-day gain in a month

* STOXX Europe 600 Banks index gains 5.7 pct

* Trading volumes thin, rally seen by some as technical

By Brian Gorman

LONDON, Nov 28 (Reuters) - European shares notched up their biggest one-day gain in a month on Monday, led by banks and insurers, on hopes euro zone leaders will unveil fresh measures to help resolve the region's debt crisis, ahead of a summit next week.

The FTSEurofirst 300 index of top European shares rose 3.6 percent to 940.88 points, the highest close in more than a week and the biggest one-day gain since Oct. 27. However, the index is still down 5.5 percent in November. Trading volume was nearly 15 percent below the index's 90-day average.

The heavyweight banking sector contributed most to the index's gain. BNP Paribas rose 10.3 percent. The STOXX Europe 600 Banking Index rose 5.7 percent, though it is still down 36.5 percent in 2011, with several banks having had to write down the value of government bonds in the euro zone periphery.

Insurer AXA, also exposed to the euro zone periphery, surged 13.1 percent.

Germany and France stepped up a drive on Monday for powers to reject euro zone members' budgets that breach EU rules. Finance ministers of the 17-nation currency area meeting on Tuesday are due to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets.

But some strategists remained sceptical about hopes for a resolution to the crisis. They pointed to low trading volume and said recent weakness in the market, tempting buyers, was a major factor behind the surge in shares.

"Any kind of good news was always going to be taken as positive. There has been some bargain hunting going on. The market got oversold in the last few weeks and some of the most cyclical areas of the market seemed to be pricing in the worst fears," said Erik Esselink, fund manager at Invesco Perpetual, which has 5 billion euros under management.

Belgian banks rose, with KBC up 13.8 percent after the country's government negotiators over the weekend secured an agreement on a budget for 2012, helping assuage concerns about the value of Belgian government bonds that the lenders hold.

Banks with exposure to Italy, which includes several French banks, benefited from a report in Italian newspaper La Stampa suggesting the International Monetary Fund was preparing a rescue plan for Italy worth up to 600 billion euros, later dismissed by an IMF spokesperson.

10-year Italian bond yields fell, but remained above 7 percent. Higher bond yields in the euro zone have been a major factor in pulling equities lower in recent weeks.

Many strategists are disappointed with the level of bond buying by the European Central Bank to calm government debt markets. It bought 8.5 billion euros of euro zone government debt in the latest week, in line with its previous activity but well short of what economists say is necessary to turn market sentiment around.

Across Europe, France's CAC40 and Italy's FTSE MIB were among the strongest performers, up 5.5 and 4.6 percent respectively.

WEAK PROSPECTS FOR RALLY

"A significant price recovery remains unlikely, since only verbal statements by Merkel and Sarkozy can hardly generate enough momentum for lasting confidence," said Arne Cordes, director Debt Markets Rates Sales at WestLB.

Technical analysts were also downbeat.

"The fact that many technical indicators have slumped to three-month lows suggests that a trading bounce might be imminent. A 38.2 percent retracement of the latest decline gives a short-term upside target of around 944," said Bill McNamara, technical analyst at Charles Stanley.

Still, the weakness may be seen as generating good entry points for value investors

"The market is traded by macro people, who have no clue about individual stocks, creating great opportunities for long-term stockpickers," Esselink said.

Staffing company Randstad, up 3.9 percent, was among the cyclical firms he identified as offering value.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.