In Europe: European shares bounce back, led by peripheral markets

2 October 2012

Bailout request set to lift markets…trying times I’d say.

European stocks rose around midday on Tuesday, reversing early losses and led by peripheral markets on growing expectation of a near-term bailout request from Spain.

At 1104 GMT, the FTSEurofirst 300 index of top European shares was up 0.3 percent at 1,108.28 points, after losing as much as 0.7 percent in morning trade.

Spain’s IBEX stock index was up 1.4 percent, with Telefonica up 1.9 percent and Endesa up 2.3 percent, while its benchmark 10-year government bond yield fell to 5.78 percent.

“For this (stocks) rally that started in July to go on, we need more visibility on Spain, and a bailout would bring just that,” a Paris-based trader said.

Euro zone sources told Reuters on Monday that Spain was ready to request a bailout as early as next weekend, but German officials said Madrid should hold off.

European stocks have rallied sharply since late July, when European Central Bank head Mario Draghi said he was ready to do whatever it took to save the euro, later announcing a bond buying programme to cut the borrowing costs of struggling states.

The Euro STOXX 50 surged as much as 22 percent, hitting a six-month high in mid-September, but has since lost steam, halted by doubts over whether Spain is willing to request a bailout, a condition for the ECB to start buying the country’s bonds.

Credit Suisse strategists held a “small underweight” position on European banks – up 43 percent since Draghi’s comments – and cut their stance on insurers to “benchmark” from “overweight”.

“(Banks’) relative earnings momentum is troughing, banks’ share of market cap is close to a 20-year low and some measures of bank risk are back to recent lows,” the strategists wrote in a note.

“But we believe banks should be around 30 percent cheaper… to compensate for the high risks: taxation, disintermediation, further regulation, change to bankruptcy laws,” they wrote.

Around Europe, UK’s FTSE 100 index was up 0.3 percent, Germany’s DAX index up 0.5 percent and France’s CAC 40 up 0.3 percent.

The euro zone’s blue chip Euro STOXX 50 index was up 0.6 percent at 2,514.49 points, moving back above the 23.6 percent Fibonacci retracement of the ‘Draghi effect rally, sending a positive signal.

UBS chartist Michael Riesner sees good chances of European stocks reversing the pull-back of the past three weeks.

“As long as the pivotal late August lows are intact means that price structure of the June bull leg is intact as well,” he wrote in a note.

“We expect another bounce/rally attempt starting this week and if so, we see a good chance to get a serious re-test if not even a marginal break of the mid-September high before seeing a more important trading top forming.”


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