European markets at two-month high

European equities scaled two-month highs today, drawing support from policy measures to battle the euro zone crisis and expectations of more to come, but weak Chinese data kept a lid on gains.

Factory activity in China's private sector shrank at its fastest pace in seven months in June, data showed today, dampening prospects for European companies which are increasingly looking abroad for earnings growth as the region's domestic economy stumbles.

The silver lining for equities is that weak data could galvanise policymakers into action to stimulate the economy. The European Central Bank is widely seen cutting interest rates at this week's meeting.

With European leaders unexpectedly agreeing on bold initiatives at the end of last week, including allowing the euro zone's ESM bailout fund to inject money directly into stricken banks, that could provide enough of a boost to turn some investors more upbeat on the region's unloved stock markets.

"I would not say it's a real game changer but it gives the market some breathing space over the next couple of weeks," Gerhard Schwarz, equity strategist at Baader Bank, adding that bearish positioning left the market open to further gains, though with caveats.

"The data out of Asia certainly is still showing that, in particular in China, sentiment is deteriorating ...It is an environment where only the flexible investors are able to make money, so a lot of long only investors will be sitting on the sidelines."

The FTSEurofirst 300 was up 1.1 per cent at 1,032.22 points by 9.29am. The pan-European index surged 2.6 per cent on Friday in its biggest daily gain in seven months on the back of the policy moves agreed at the European summit.

The Euro STOXX 50 index added 1.5 per cent, touching its highest levels since early May and reversing an earlier retreat after finding strong technical support around the 38.2 per cent Fibonacci retracement of its mid-March to late-May downward move.

In light of the summit measures, investment house Jefferies recommended longs on the index alongside the sale of safe-haven German Bunds.

"While the final EU communiqué was short on details and implementation, the equity markets ought to feel reasonably assured that the vicious cycle between sovereign credit rating downgrades and bank solvency has finally been broken," Jefferies' strategists said in a note.

"It only leaves ECB president Mario Draghi to cut interest rates on July 5th for European equity investors to believe that they have been underwritten." The sentiment ratio as calculated by Paris research firm 2Bremans showed a slim majority of 52 per cent of investors have a positive stance on the market.

"The fundamental backdrop for financial assets is poor, but in the short term policymakers are attempting to prop up markets via central bank action and baby steps on the road to solving the European crisis," Stewart Richardson, chief investment officer at RMG Wealth, said in a note.

The 'baby steps' cheered the banks, which have direct exposure to the region's debt crisis through their sovereign bond holdings. The sector added 0.5 per cent.

Credit Agricole was the biggest gainer on the FTSEurofirst 300, up 3.9 per cent with the broad sentiment lift bolstered by a Financial Times report that the French bank is in talks to sell its Greek affiliate Emporiki Bank and has received interest from three local lenders. Credit Agricole declined to comment.

Reuters