Spain bailout hopes help Europe stocks bounce back

Mon Oct 22, 2012 8:00am EDT

* FTSEurofirst 300 up 0.2 pct, Euro STOXX 50 up 0.4 pct

* Rajoy's victory in Galicia fuels Spanish bailout hopes

* JPMorgan sees more outperformance for Europe shares

By Blaise Robinson

PARIS, Oct 22 (Reuters) - European stocks were slightly up around midday on Monday, as renewed expectations that Spain was moving closer to seeking a bailout eclipsed recent worries over corporate results.

Euro zone banks rallied strongly, with Commerzbank up 3.8 percent and UniCredit up 2.6 percent.

Spain Prime Minister Mariano Rajoy clinched election victory in his home region of Galicia on Sunday in a result seen as overcoming a hurdle on the path to a formal bailout request.

According to European officials and analysts, Rajoy had wanted to wait until the regional elections before requesting a bailout, which would trigger the European Central Bank's bond-buying programme aimed at lowering the country's high borrowing costs.

At 1127 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was up 0.2 percent at 1,114.11 points.

The index last week surged to just a few points below a 14-month high hit in mid-September, before dropping 0.8 percent on Friday, hurt by weak corporate earnings from U.S. bellwethers such as General Electric.

The global conglomerate posted a weaker-than-expected quarterly revenue and set a cautious tone for next year, warning that it expects the tough economic environment to continue.

The euro zone's blue chip Euro STOXX 50 index was up 0.4 percent at 2,552.91 points. The benchmark index has surged around 20 percent since late July, outperforming U.S. stock indexes, on expectations the ECB will start buying bonds of debt-stricken countries to lower their borrowing costs.

"The systemic risks have abated, with the ECB becoming a lender of last resort. Europe might still be in recession but we know that already and it seems that the economic cycle might be reaching a bottom right now," Barclays France director Franklin Pichard said.

"The talks about a potential delay on the 3 percent deficit target for euro zone countries to 2014 or even 2015 to give breathing space to some countries is also a positive development that could help revive growth."

Around Europe, UK's FTSE 100 index was up 0.1 percent, Germany's DAX index down 0.1 percent, and France's CAC 40 up 0.1 percent.

Philips Electronics featured among the top gainers, up 4.5 percent after the firm posted forecast-beating results and said it is on a "good trajectory" to meet its 2013 targets.

JPMorgan strategists see Europe's stock market outperformance against the United States continuing as more investors rebalance their portfolios in response to the region's reduced macroeconomic risk

"We think that this rebalancing has more to go and that European outperformance should continue," they wrote in a note.

The strategists cited a reduction in so-called 'tail risk' after the ECB assumed the role of buyer of last resort, cheap valuations and relative earnings momentum as all favouring Europe over the United States.

"(The) valuation case for Europe is compelling. Euro zone equities trade at (a) 42 percent price-to-book discount to the U.S., and this is ex Financials," they wrote.

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