European shares rally on US data, EU summit looms
* FTSEurofirst 300 up 1.4 percent
* Building materials stocks buoyed by U.S. housing data
By Tricia Wright
LONDON, June 27 (Reuters) - European shares rebounded on Wednesday after a recent steep sell-off, with upbeat U.S. data boosting demand, though doubts a European summit will provide solutions to the euro debt crisis may cap future gains.
Demand, which has deteriorated in the past days on fears over the impact of the crisis on the world economy, improved markedly after U.S. pending home sales matched a two-year high in May, fuelling hopes of a housing market recovery.
Building materials groups CRH, Wolseley and Lafarge enjoyed solid gains following the U.S. data, up 4.2 percent, 3.7 percent, and 2.7 percent respectively, given their exposure to the U.S. housing market.
The FTSEurofirst 300 closed up 1.4 percent at 1,000.14, within a whisker of its session high, having closed flat on Tuesday after three straight sessions of falls which saw it drop almost 3 percent.
Volumes were thin, at around 75 percent of the 90-day daily average, with investors reluctant to get too aggressively involved in the market ahead of the summit.
Expectations for a big new initiative to cure the euro zone crisis from the June 28-29 meeting have been knocked back, with German Chancellor Angela Merkel seeking to bury the idea of common euro zone bonds on Tuesday, saying Europe would not share total debt liability "as long as I live".
But these reduced expectations have lowered the bar for a positive surprise, prompting investors to snap up July 'call' options on the euro zone blue-chip index - the right to buy into the market at a pre-set price and thus benefit from any rally.
For the July contract, some of the heaviest activity has been in the 2,250 contract, implying investors are betting the Euro STOXX 50 will rise by more than 5 percent in the coming three weeks from around 2,135 on Wednesday.
"There is a sense that you don't want to be short into the summit - there is a potential for a market rebound if credible measures are announced to solution sovereign debt problems in the euro zone," JPMorgan strategist Emmanuel Cau, said.
"It is important to get a detailed road map to fiscal and banking union, but our view is that you are unlikely to get too much detail at this stage."
While euro zone bonds seem a no-go for now, investors will likely cheer any integration roadmap with defined milestones. There is also a chance of removing preferred creditor status for its ESM bailout fund - which currently relegates other bond holders to second place, much to the markets' chagrin.
"We don't know quite what's going to come out of it, so positioning as you would expect is very much underweight Europe in the cash market, overweight the U.S," Orrin Sharp-Pierson, global equity and derivatives strategist at BNP Paribas, said.
"Protection is being bought for those cash holdings in the U.S. and upside being bought in Europe just to hedge against some upside risk... At the moment (investors) are positioned for more bad news in Europe relative to the U.S."
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