Euro zone shares at 2-week highs, awaiting ECB catalyst

Thu Sep 6, 2012 6:31am EDT

* EuroSTOXX 50 up 1.1 pct, hits 2-week highs
    * ECB eyed for details of bond purchase plan
    * Positioning, sentiment likely to limit any disappointment

    By Toni Vorobyova
    LONDON, Sept 6 (Reuters) - Euro zone equities rose to
two-week highs on Thursday, with investors looking to the
European Central Bank to support risk appetite by detailing
plans for a new bond-buying programme to help bring down
borrowing costs for Spain and Italy.
    The onus is on ECB President Mario Draghi to back up his
promise "to do whatever it takes" to preserve the euro at a 1230
GMT news conference following the bank's monthly meeting.
    Investors are looking for clues on the likely size and
timing of the bond programme, on any specific cap on yields -
seen as unlikely - and on whether the ECB will insist on a
preferential, more senior status compared to the other bond
holders in case of a default. 
    "Draghi has made it clear that he is going to do whatever it
takes," said Nancy Curtin, chief investment officer at Close
Brothers Asset Management.
    "The reason markets are rallying is (that) it moves us back
into a muddle-through scenario ... It removes the Armageddon
risk from the break up of the euro zone but it doesn't
completely solve the euro zone's problems."
    The EuroSTOXX 50 index of euro zone blue chips was up 1.1
percent at 2,469.50 points at 1006 GMT, after rising as high as
2,478.85, its strongest since Aug. 22.
    The broader, pan-European FTSEurofirst 300 added
0.8 percent at 1,083.97 points, recovering from a one-month
intra-day low of 1,074.05 points set on Wednesday.
    Anticipation that ECB action might in time boost the
region's struggling economy aided commodity prices and helped
miners to perform strongly, with Antofagasta, Randgold
Resources and Norsk Hydro among top gainers.
    Gold miners are a top pick for Curtin at Close Brothers, who
for now remains more cautious about equities as a whole.
    "We might look to perhaps increase our equity weighting into
the year end," she said. "If all this liquidity does come
through, if there are some signs of perkier economic activity,
and if there is a setback in markets, this could set up an
interesting rally for the year end."
      
 
    
    ANY DISAPPOINTMENT MAY NOT LAST 
    With EuroSTOXX 50 still up some 14 percent since Draghi made
his pledge on July 26, and euro zone banks some 36
percent higher, the risk is that the ECB announcement
could fall short of the markets' high expectations.
    With yields on two-year Spanish and Italian
 bonds hitting their lowest levels in around five
months, the ECB's rhetoric alone has already achieved some of
its goals and the central bank may be in no hurry to follow
words with actions just yet.
    But strategists reckon any downside pullback if the ECB
disappoints could be limited, given the expectations that it
will eventually act, prospects for more stimulus from the U.S.
Federal Reserve and positioning in the equity market where
investors are relatively well hedged to the downside.
    Open interest on September EuroSTOXX 50 puts - options which
enable investors to sell the index at a pre-set price and which
are used as insurance against a market fall - has risen 15
percent over the past month, according to Eurex exchange data.
    Implied volatility on the euro zone blue chip index is up 17
percent over that time, in an unusual break of its
negative correlation with the underlying cash equity market
which has stayed broadly flat. 
    At the same time, investors have continued to pull money out
of European equity funds, according to EPFR data, leaving them
relatively under-invested in the market.
    "The risks still tend to be on the upside, very few people
are committed to the market," said Andy Ash, head of sales at
Monument Securities.
    "The likelihood is that the market will be disappointed that
they are not getting any more (information), but when it comes
off people will look at the overall performance of the market
this year and think oh dear, equity markets are now sizeably up
on the year, I don't have any positions ... So in the next week
one or two people will get long of the market."
    In the short-term, any disappointment could send EuroSTOXX
50 down to 2,315-2,310 area, according to Mike Turner, European
equity options broker at London-based XBZ Ltd.
    "If the details are sketchy at best, that would constitute a
disappointment," he said.
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