FRANKFURT European shares soared to their highest close in 12 weeks Thursday, with banks surging after European Union leaders struck a deal to help resolve the euro zone debt crisis.
The STOXX Europe 600 Banking Index .SX7P rose 8.9 percent, though strategists warned that the market gains may be short-lived after more details of the plan become available.
French banks, heavily exposed to euro zone peripheral debt, were among the biggest gainers. They had suffered in recent months on worries that a Greek default would result in a deep banking crisis. BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA) rose 16.9, 22.5 and 22 percent, respectively. Insurer Axa (AXAF.PA) rose 14.7 percent.
Such a crisis would affect banks beyond the euro zone, and other gainers included British bank Barclays (BARC.L), up 17.6 percent, on relief the worst-case scenario seems to have been averted for now.
The FTSEurofirst 300 .FTEU3 index of top European shares rose 3.7 percent to 1,020.10 points, the highest close since August 3. Trading volume was high, at 137.7 percent of the 90-day average for the index, breaking a recent pattern of weak volumes.
Euro zone leaders struck a deal with private banks and insurers for them to accept a 50 percent loss on their Greek government bonds under a plan to lower Greece's debt burden and try to contain the two-year-old euro zone crisis. The deal also provides a boost to the region's bailout fund to 1 trillion euros and foresees a recapitalization of bank balance sheets.
"Decisions have been made, whatever they are, and that's a good thing. I fear further down the road we'll find they're not as good as we thought," said Gavin Launder, fund manager at Legal & General, which has 356 billion pounds ($570 billion) under management.
Launder said banks may be leading a rally into the year-end, prompting some investors to act for fear of missing out.
"(The surge in shares) has as much to do with positioning as anything we've learned overnight. With the (summit) out of the way, there's been a massive scramble. Hedge funds have been underweight banks, and sitting on cash."
The pan-European index .FTEU3 is down 9 percent this year on worries about the euro zone and slowing global growth. But it is up 19.6 percent from a 2011 low it hit last month on optimism policymakers are acting to stem the crisis.
"The only concern is that this post-deal euphoria could well leave investors with a nasty hangover when they start to look at the fine print and realize that this solution could well be another sticking plaster," said Michael Hewson, market analyst at CMC Markets.
The index broke through, but then closed just below, a key technical level, 1,021.8, the 50 percent retracement of its fall from a 2011 high in February to the low in September.
"(The rise) strongly suggests that the Eurofirst is breaking out of the range that has defined its price action for the last couple of months and there should be no doubt that this represents a potentially major technical development," said Bill McNamara, technical analyst at Charles Stanley.
MINING, AUTOS GAIN
Economically sensitive sectors such as mining and autos were among the other big gainers. The STOXX Europe 600 Basic Resources Index .SXPP rose 6.4 percent. Optimism on the euro zone deal, which may help avert recession, helped to boost base metals prices, especially in dollar terms, as the euro gained.
Across Europe, Britain's FTSE 100 .FTSE rose 2.9 percent; Germany's DAX .GDAXI and France's CAC40 .FCHI rose 5.4 and 6.3 percent, respectively.
The auto sector .SXAP, which includes several German companies, helped the DAX, despite Daimler (DAIGn.DE) and Volkswagen (VOWG_p.DE) reinforcing the gloomy outlook for Europe's car industry.
(Editing by Will Waterman)