* FTSEurofirst 300 up 0.4 pct, Euro STOXX 50 up 0.6 pct
* VSTOXX hits 5-year low, dips below U.S. VIX
* Nokia, Alcatel surge as short sellers cover positions
* Short sellers the big losers of 2012 -EDHEC data
By Blaise Robinson
PARIS, Dec 18 European shares rose on Tuesday,
with the euro zone blue-chip index hitting a near 17-month high,
as investors bet that U.S. Democrats and Republicans would reach
a deal to avoid looming austerity measures.
Expectations of a deal rose in Washington, boosting U.S.
stocks, after House of Representatives Speaker John Boehner
emerged from a meeting with fellow Republicans pledging to press
forward on talks to avert a deadlock.
The FTSEurofirst 300 index of the biggest European
shares gained 0.4 percent in brisk volumes, to close at 1,137.43
points. That was just a few points shy of its 2012 high of
1,141.32 hit last week.
Cyclical shares featured among the biggest gainers, with
mining giants Rio Tinto up 2.8 percent and Anglo
American up 2.1 percent, while banks also rallied, with
UBS rising 1.9 percent and Banco Santander
gaining 2.2 percent.
"There's a lot of money being re-allocated on equities at
the moment as the perceived risk is retreating," a Paris-based
"I think this rally can go on for a few more weeks, although
it will seriously reduce the upside potential for indexes in the
rest of 2013."
The euro zone's blue chip Euro STOXX 50 index
gained 0.6 percent to close at 2,643.50 points, a level not seen
since mid-2011. The blue-chip index has surged 29 percent in the
past seven months, propelled in part by central banks' moves to
support global growth and resolve the euro zone debt crisis.
"The rally continues, without volatility. Markets are
becoming complacent and every little dip is being bought. It
feels like 2007," FXCM analyst Nicolas Cheron said.
The Euro STOXX 50 Volatility Index, or VSTOXX,
Europe's widely used measure of investor risk aversion, sank to
a five-year low of 15.64 on Tuesday.
The VSTOXX - used to measure the cost of protecting stock
holdings against potential pull-backs as it usually moves in the
opposite direction to cash equities - has also slipped below
Wall Street's own 'fear gauge', the VIX. That marks an
unusual crossing and a further sign of investors positioning for
additional gains in European equities.
"What you're seeing is a switch in investors' minds," a
London-based volatility and derivatives trader said.
"People realise that the euro zone won't fall apart and
they're coming back to European assets, while at the same time
they are starting to worry about the U.S. budget and the risk
that earnings there might have peaked already," the derivatives
A number of market players, however, warned about the risk
of investor complacency about Europe, still entangled in a
severe debt crisis and with much of the region either in or
"People are lowering their guard, cutting their hedges. At
the first negative news in the new year, the risk is that they
will all scramble to book their profits, sparking a serious
pull-back," a Paris-based equity and exchange-traded funds
(ETFs) trader said.
Around Europe, UK's FTSE 100 index gained 0.4
percent, Germany's DAX index added 0.6 percent, and
France's CAC 40 rose 0.3 percent.
So far this year, the FTSE is up around 7 percent, the DAX
is up 30 percent and the CAC has gained 16 percent, while both
the FTSEurofirst 300 and the Euro STOXX 50 are up 14 percent.
Shares in Nokia and Alcatel-Lucent
jumped 7.9 percent and 8.3 percent respectively on Tuesday,
extending their recent sharp rallies fuelled by improved
sentiment toward the two troubled tech companies, which has
prompted short sellers to cut their negative bets on the stocks.
Nokia, boosted by growing expectations of strong sales of
its new Lumia smart phone models, has soared 140 percent since
hitting a floor in July, while Alcatel, rising after a recent
financing deal, has gained 47 percent since mid-October.
Nokia is still down 15 percent this year while Alcatel has
fallen 13 percent.
The two companies have been among the most shorted stocks in
Europe in the past few months.
The hedge fund strategy - which involves betting on falling
stock prices by borrowing shares, selling them, then buying them
back more cheaply - has been suffering this year, down 16
percent, according to EDHEC-Risk Institute data.
By contrast, the best hedge fund strategy has been to invest
in so-called distressed securities - stocks and debt of troubled
companies going through restructuring or facing financing issues
- up 11 percent year-to-date, according to EDHEC data.