* FTSEurofirst 300 +1.1 pct, Euro STOXX 50 +1.2 pct
* Both indexes rise above key resistance levels
* Volatility index reverses August spike
* Further gains seen as valuations remain low
* Equity inflows seen for first time in 5 weeks -EPFR
By Blaise Robinson
PARIS, Oct 17 (Reuters) - European stocks rose early on Monday, extending their brisk rally into a third week as investors rush back into equities on mounting expectation of a bold plan to fight the euro zone debt crisis at next weekend’s European Union summit.
Cyclical mining shares led the gains, with BHP Billiton up 2 percent, while BP surged 5.2 percent after agreeing on cleanup costs with Anadarko , its partner in the well that caused the massive Gulf of Mexico oil spill.
At 0836 GMT, the FTSEurofirst 300 index of top European shares was up 1.1 percent at 986.21 points, hitting a 10-week high and breaking above a major resistance level, the 50 percent retracement of the index’s slump from late July to late September.
The euro zone’s blue-chip Euro STOXX 50 index was up 1.2 percent at 2,385.28 points, climbing above the 50 percent retracement of the nosedive of the past few months as well as the 38.2 percent Fibonacci retracement of the fall from the year’s high hit in mid-February, sending a strong bullish signal.
“This is a correction of the excessive retreat seen during the summer. The worst-case scenario of debt defaults from many euro zone countries or even of a break-up of the bloc that had been priced in has been avoided,” said Marc Touati, head of economic research at Assya Global Equities.
“And this relief rally is not over, when you look at the major gap between market capitalisations and shareholders’ equity.”
Despite the brisk recovery rally, valuation ratios remain very low, with the broad STOXX 600 index trading at 8.3 times 12-month forward earnings, while the index’s average price-to-book ratio is 1.12, the lowest since March 2009.
The Euro STOXX 50 volatility index , Europe’s main fear gauge known as the VSTOXX index, tumbled to a 10-week low on Monday, reversing a surge started in August amid fears that Greece’s debt troubles would spread to Italy and Spain.
The VSTOXX, which measures the cost of protecting against a decline in shares on the Euro STOXX50 Index, was down 5.7 percent at 32.96, a level not seen since Aug. 4.
The lower the volatility index, based on sell- and buy-options on the Euro STOXX 50 stocks, the higher investors’ appetite for risky assets such as stocks. The VSTOXX has dropped 45 percent since a peak hit on Aug. 9.
Banking stocks also rallied on Monday, with UniCredit up 3 percent while BNP Paribas added 1.6 percent as investors brushed aside the bank’s credit downgrade by Standard & Poor’s.
Bullish signs for stocks were also emerging from fund flow data, with developed-market equity funds eking out net inflows last week for the first time in five weeks, according to EPFR Global.
“If you look at flows into ETFs, which allow investors to express their changing sentiments with more immediacy than other types of funds, optimists would appear to have the momentum,” EPFR managing director Brad Durham said in a report.