European shares rally after EU deal

European shares rally after EU deal

Stocks increased their gains, led by banks and insurers, after a source told Reuters China’s central bank plans to create a new vehicle to manage two investment funds worth a total of $300 billion, one targeting investments in the United States and the other focused on Europe.

At 6:25pm, the FTSEurofirst 300 index of top European shares was up 1% at 983.39 points in relatively low volumes, reversing a three-session drop.

The euro zone’s blue chip Euro STOXX 50 index was up 1.8% at 2,328.06 points, but gains were capped as the index struggled to break above a key resistance level, the 23.6% Fibonacci retracement level of its rally from late November to this week’s peak.

Earlier in the session, that index drifted into negative territory and tested its 50-day moving average, a major support level, before bouncing back.

The bounce between the two key technical levels showed investors’ mixed reaction to news coming out of the EU summit.

All 17 euro zone countries and six others that aspire to join the currency bloc resolved to negotiate a new agreement alongside the EU treaty, with a tougher deficit and debt regime.

But the fact that Britain was left out of the deal and the lack of progress on immediate measures to ease pressure on government bond markets prompted a number of investors to doubt Friday’s rally would last.

“From what we have seen so far, this summit has not produced a silver bullet," said Gary Jenkins Head of Fixed Income at Evolution Securities.

Banking stocks featured among the top gainers, with Intesa SanPaolo up 6.4%, Deutsche Bank up 4.9% and Natixis up 4.7%, reversing most of the losses suffered earlier in the week.

Insurers also gained ground, with Allianz up 2.7% and AXA up 1.8%.

“We have another euro agreement but one that misses the point," said Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment.

“There are probably only two stable equilibria, full political union or break up. With neither imminent, I’d say volatility is here to stay ... What we would need to see to end the crisis once and for all is full burden sharing -- with clear and unconditional ECB support the first step," he said.

Renewed investor appetite for European stocks was dampened on Thursday by ECB President Mario Draghi who poured cold water on hopes the central bank would step up bond purchases, seen as key to stabilize the borrowing costs of troubled euro zone countries.

According to data from EPFR Global, which tracks fund flows and asset allocation data, investors have been cutting their overall equity exposure to the euro zone throughout the fourth quarter, and flows have remained negative despite the strong stock market rally started in late November.

“Daily flow data during the fourth quarter suggests investors are losing patience with the euro zone’s inability to contain its long running crisis," EPFR said in a note.

However, the picture is different at Source, a major provider of European exchange-traded funds (ETF). It is seeing overall inflows into ETFs so far in December as investors seem to have been playing the recent rally through ETFs instead of by directly buying stocks, a sign the rally remains fragile.

“The systemic risk is fading, but the environment remains tough. The ‘hunt for yield´ will remain in vogue next year," said Jean-Marie Mercadal, head of management at OFI Asset Management, which has 47 billion euros ($63 billion) under management.

OFI AM remains cautious on equities, favouring instead corporate credit -- both high yield and investment grade-- and within equities, the group favours stocks with high dividend yields.