* FTSEurofirst 300 up 1.3 pct, Euro STOXX 50 up 1.8 pct
* Drop in volatility index signals risk appetite recovery
* Technical rebound led by short covering -FXCM’s Ganne
By Blaise Robinson
PARIS, June 7 (Reuters) - European shares ended sharply higher on Friday, reversing losses after U.S. jobs data indicated the economy was growing but probably not enough to prompt the Federal Reserve to wind down its stimulus measures.
The rally was broad-based, with banking shares among the top blue-chip gainers. Deutsche Bank added 3.8 percent, Credit Agricole rose 3 percent and UBS gained 3.4 percent.
The FTSEurofirst 300 index of top European shares closed 1.3 percent higher at 1,194.26 points, erasing a portion of the week’s losses, while the euro zone’s blue-chip Euro STOXX 50 index added 1.8 percent, to 2,724.08 points.
“A lot of people have been in ‘risk-off’ mood this week, and we could see them coming back in the next days. Just look at the volatility index,” said David Thebault, head of quantitative sales trading, at Global Equities.
The Euro STOXX 50 Volatility Index, known as Europe’s ‘fear gauge’, tumbled 10 percent on Friday, signalling a sharp drop in investors’ risk aversion.
Data showed the U.S. economy added 175,000 jobs in May, just above the median forecast in a Reuters poll. The unemployment rate though ticked higher to 7.6 percent.
European stocks surged between late-April and late-May, boosted by massive liquidity injections from central banks, including the Fed’s buying of $85 billion per month in Treasuries and mortgage-backed securities to try and boost economic growth.
The rally lost steam late last month, however, after a batch of robust data sparked speculation the Fed could soon start to trim its quantitative easing programme.
Investors have been particularly nervous since Fed Chairman Ben Bernanke last month said the central bank may decide to trim its programme within the next few Fed policy meetings if data shows the economy is gaining steam.
Around Europe, the UK’s FTSE 100 index added 1.2 percent on Friday, Germany’s DAX index gained 1.9 percent, and France’s CAC 40 rose 1.5 percent.
FXCM analyst Vincent Ganne warned that Friday’s rally was a technical bounce after the sharp pull-back of the past two weeks, and the rebound could be short lived.
“This rally is fueled by short sellers booking their profits. The correction phase on the downside is probably not over yet,” he said.
Charts show that despite Friday’s rally, both the Euro STOXX 50 and the FTSEurofirst 300 remained below negative trendlines started in late May, a technical signal that the indexes’ two-week retreat could resume next week.