Frankfurt: Financial stocks led European shares higher on Thursday after EU leaders and banks struck a deal intended to draw a line under the euro zone’ spiraling debt problems, setting up the market for its biggest gain in more than two years.
European banks , hit hard by their large exposure to peripheral euro zone countries and which are down 26% this year, spiked 7.3% following the agreement.
Under the deal, the private sector agreed to voluntarily accept a nominal 50% cut in its bond investments to reduce Greece’s debt burden by 100 billion euros, cutting its debts to 120% of GDP by 2020, from 160% now. The deal also provides a boost the region’s bailout fund to 1 trillion euros and foresees a recapitalisation of bank balance sheets.
“The measurements did not include surprises, but the decision to make it instead of further discussions is the trigger to give the markets the needed tailwind,” said Roger Peeters, strategist at Close Brothers Seydler Research.
At 4:30pm, the FTSEurofirst 300 index of top European shares was up 3% at 1,012.96 points after rising as high as 1,014.01, the highest since early August.
The index is on track for a fifth straight week of gains and the biggest monthly rise in more than two years, but is still down 10% this year.
Europe’s main investor fear gauge, the VDAX-NEW volatility index , fell 16.4% and dropped to its lowest level in nearly three months.
The lower the volatility index, based on sell- and buy-options on Frankfurt’s top-30 stocks the higher is investors’ appetite for risky assets such as equities and commodities.
Across Europe, Britain’s FTSE 100 .FTSE index rose 2.4%, Germany’s DAX .GDAXI was up 4.2% while Italy’s FTSE MIB climbed 4.5%.
Trading volumes were at 50-80% of 90-day average levels around midday for the main indices.
STILL SOME HUGE QUESTIONS
While some said this could be a turning point for stocks others voiced reservations.
“Last night’s deal was not necessarily the best possible one nor was it one which will for certain fix all the problems (but) it will definitely prevent the crisis from spilling over to Italy and Spain,” said Markus Huber, head of German sales trading at ETX Capital.
Dominic Rossi, Global Chief Investment Officer Equities at Fidelity Worldwide Investment said the deal was no game changer.
“Italy’s 120% debt-to-GDP doesn’t look any more sustainable today than yesterday. Europe is destined for a multi-year workout... where economic growth will be very restrained and equities will remain cheap,” he said.
ETX Capital’s Huber added there were still “huge” questions. “Will Italy actually manage to pass further austerity measures and also will it manage to sell enough state assets at decent prices to reduce their debt burden?” he said.
Traders noted that a further boost could come later in the day from economic growth data from the United States, while a slight beat of expectations may already be priced in.