European shares climb on U.S. debt deal hopes

Tue Oct 15, 2013 11:24am EDT

* FTSEurofirst 300 up 0.8 percent

* Burberry drops 7.1 pct after CEO leaves

* Cyclical miners, autos lead market higher

* European stock 'fear gauge' drops 7.7 pct

By Tricia Wright

LONDON, Oct 15 (Reuters) - European shares rose on Tuesday, with some benchmark indexes hitting multi-year highs, bolstered by indications that a deal could soon be clinched in Washington to avert a debt default.

The FTSEurofirst 300 was up 0.8 percent at 1,262.50 points by 1515 GMT, led by miners and autos as investors bought into cyclical shares.

The blue-chip Euro STOXX 50 index added 0.8 percent to 3,001.94 points, hitting a fresh 2-1/2 year high, while France's CAC 40 rose 0.7 percent to a 5-year high and Germany's DAX was up 0.9 percent, at a record high.

Positive signals from talks on Monday between Democrat and Republican Senate leaders fuelled hopes of an imminent deal to reopen shuttered U.S. federal agencies and prevent a default on federal debt.

Republicans also hope to pass their own version of legislation to reopen the federal government, it emerged on Tuesday.

The Euro STOXX 50 Volatility index, or VSTOXX, reversed Monday's gains, down 7.7 percent, signalling a sharp rise in demand for risk.

"It's a risk-on day. The market's anticipating a resolution to the gridlock in the U.S. and equities have responded accordingly," Neil Veitch, investment director at SVM Asset Management, said.

The better mood was also visible in the derivatives market, with the Euro STOXX 50 put/call ratio falling back to 1.2, down from a four-year high of 3.9 hit two weeks ago.

The ratio, a widely used European gauge of investor sentiment, measures the trading volume of put options versus call options on the Euro STOXX 50 .STOXX50E.

A ratio below 1 signals bullishness, while a ratio above 1.5 usually signals that investors are turning cautious, buying 'puts' as a hedge for their equity portfolios in case of a correction.

"The sooner that we get to a resolution, depending on how long-lasting that resolution is, then markets should quieten down, but (there might not be) a big rally because we haven't been seeing a significant amount of downside despite the uncertainty," Henk Potts, market strategist at Barclays, said.

SVM's Veitch concurs, seeing little scope for stock markets to gain much more in the event of a short-term fix, whilst cautioning that the third-quarter earnings season is shaping up to be an unlikely driver of the next leg higher in equities.

"(What is) likely is that we'll get another 'kick the can down the road' type of exercise, in which case given markets have been robust it's unlikely that we'll see a significant move," SVM's Veitch said.

"There's not a lot there to propel the market higher. The early indications that we've seen out of the earnings season... have not been wholly encouraging."

Bucking the strong trend, UK luxury goods maker Burberry Group dropped 7.1 percent to its lowest levels since July following the departure of long-standing boss Angela Ahrendts to Apple.

Swiss elevator manufacturer Schindler on Tuesday became one of the latest European companies to issue a profit warning, sending its shares down 5.6 percent.

Profit warnings have impacted stocks this month and analysts have cut 2013 earnings estimates for the pan-European STOXX 600 index by 3 percent since the start of the third quarter. ()