London: European stocks rose on Thursday, extending a sharp rally from the previous session, as investors became more optimistic that policymakers would act to avert recession and tackle the euro zone debt crisis.
At 4:31pm, the FTSEurofirst 300 index of top European shares was up 0.9% at 939.23 points, after gaining 3.1% on Wednesday, having hit a two-year closing low on Tuesday.
The index is down more than 16% in 2011, as investors cut their exposure to risky assets such as stocks following an escalation of the euro zone debt crisis, and weak economic data from major economies that have sparked concern they may go back into recession.
The European Central Bank is expected to signal a change in policy direction on Thursday, halting an interest-rate rise cycle just five months after it started as the euro zone debt crisis weighs on the economy.
In a decision to be announced at 1145 GMT, the ECB is likely to keep interest rates on hold at 1.5%, but investors will look for policy pointers at a press conference beginning at 6:00pm.
“While some analysts appear to be ruling out an early rate cut it would be no surprise if (Trichet) indicated the possibility of an easing of monetary policy in the next couple of months, especially as the likelihood of an improvement in the economic outlook appears unlikely given the current economic backdrop,” CMC Markets analyst Michael Hewson wrote in a note.
US President Barack Obama will make a speech to Congress after the close of European markets, during which he is expected to propose $300 billion in tax cuts and government spending as part of a job-creating package.
“The market is getting more optimistic about some kind of policy response. There’s talk that Obama will announce an infrastructure package. These things on their own are fairly small, but together they add up,” said Daniel McCormack, equity strategist at Macquarie in London.
As expected, the Bank of England held its key interest rate at a record low of 0.5%, where it has been for two and a half years.
Beaten-down bank shares rallied for a second day. The STOXX Europe 600 Banking Index rose 2.1%, though it is still down more than 30% in 2011.
“A bank like BNP Paribas trades at four times expected earnings for 2012, while in our worst-case scenario for next year, we get a price-to-earnings ratio of 7-8... At these levels, European stocks are pricing in the breakup of the euro zone,” said Regis Begue, head of equities at Lazard Freres Gestion, which has 11 billion euros ($15.4 billion) under management.
BNP Paribas rose 3.9%. Deutsche Bank rose 4.5% after comments from its chief executive maintaining 2011 operating profit targets.
But Greek banks fell 6%. Anger at Greece’s failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals.
Across Europe, Britain’s FTSE 100 , Germany’s DAX and France’s CAC40 rose between 0.7 and 1.1%.
“The Dax has been in near free-fall over the last few weeks and by the time it reached 5,193 on Tuesday it was down by more than 30% from its highs for the year, putting it firmly in bear-market territory,” said Bill McNamara, technical analyst at Charles Stanley.
“At the low the index had retraced fully 61.8% of the rally that began in 2003, implying that there is some support at that level. That being the case, further near-term gains now look likely - 5,869 is the next area of possible resistance.”