European stocks boosted by debt crisis hopes

European stocks boosted by debt crisis hopes

Frankfurt: Banking and insurance stocks led European share markets higher on Tuesday, fuelled by hopes that European policymakers are at last putting together an action plan to tackle the euro zone debt crisis.

Share prices extended gains made on Monday, getting a further boost from officials at the European Central Bank saying they were keeping options for a rate cut open and signalled that the bank could start offering 12-month, limit-free loans to banks again.

Financial sector stocks were among the top gainers, with the STOXX Europe 600 banking index up 4.5% and the insurance sector index up 5.4%.

The FTSEurofirst 300 broader market index was up 3.2% at 926.15 at 1115 GMT, the highest level since Sept. 21 and cutting this year’s losses to 20%.

Traders, however, said volumes were thin at 30% of 90-day average around midday, indicating the rebound could be a short-term technically-driven bounce.

“The news is very uplifting for the financial shares However, whether the (crisis action) plan will put the whole region on solid footing is debatable," a trader said.

The VDAX-NEW volatility index , one of Europe’s main barometers of investor anxiety, dropped 5.2% while the Euro STOXX volatility index fell 5.4%, signalling a drop in investors’ aversion to risky assets.

The lower the volatility index, based on sell and buy options on Frankfurt’s top-30 stocks, the higher is investors’ appetite for riskier assets such as equities and commodities.

“European leaders eventually will find a solution ... I cannot see how we can avoid some form of (Greek) debt restructuring, followed by unlimited support for other countries," said Eric Le Coz, deputy general manager at Carmignac Gestion, which has 50 billion euros ($67.4 billion) in assets under management.

The cost of insuring Italian and Spanish debt against default fell, with Italian credit default swap (CDS) spreads narrowing by 28 basis points on the day to 4.75% and the Spanish equivalent easing 18 bps to 3.8%. French five-year CDS were also down 17 bps on the day at 1.79%.

Still the recovery could be fragile as the ratio of put/call open interest on the Euro STOXX 50 fell to 1.1139, still hovering near a 10-month low, according to data from Thomson Reuters Datastream, indicating weak equity investor sentiment.

“It is still possible that we may go 15% lower before we go up, because the (political) response to the eurozone problems has not been the final one yet," said Carmignac’s Le Coz, adding he only holds financial stocks in his emerging equities portfolio.

“The exposure of our global equity fund to equities is just above 60%, so the minimum, almost."