Markets rally after a miserable fortnight

EURO CRISIS:STOCK MARKETS experienced a sharp rally after finishing their worst week in two months, but fears for the euro zone linger as Treasury yields and the euro see little change.

Traders attributed the bounce to hopes of an imminent deal from France and Germany ahead of next week’s summit which would take a stricter approach towards governments’ budgets and borrowing.

There was also hope that China had agreed to provide funding to Europe via the International Monetary Fund, but reports suggest that any funds China gave to the IMF would not be earmarked specifically for Europe.

Traders also say a large part of the rally is being driven by book squaring after a miserable couple of weeks in which the FTSE All-World slid 9 per cent. Italian bond yields, which soared last week, have fallen, with two-year yields dropping more than half a percentage point to 7.11 per cent.

However, much of the sharp gains were achieved on very low volumes, and some market analysts pointed out that the recent market weakness meant a surge was inevitable.

“Volumes are not there because large asset managers aren’t buying into this rally. These are more discussions that might go nowhere. Unless you get a real concrete plan, the market will drift back in again,” said Kenneth Polcari, managing director at Icap Equities.

Europe opened strongly amid rumours that a rescue package for Italy was being devised, something that was subsequently dismissed by an IMF spokeseman. Stock markets continued to rally, brushing off warnings from the OECD and ratings agency Moody’s, which said that the rapid escalation of the euro zone sovereign and banking crisis threatens the credit standing of all European government bond ratings.

Banking stocks led the advance yesterday. The STOXX Europe 600 banking index rose 5.7 per cent, though it is still down 36.5 per cent in 2011, as banks have written down the value of government bonds in the euro zone periphery.

Nonetheless, yesterday all the major banking stocks, including the three Irish financials, saw the strongest advances on equity markets, with BNP Paribas rising 10.3 per cent.

The US took its lead from Europe, surging by about 3 per cent, boosted by retail figures which showed a strong performance over Thanksgiving weekend. Sales on Black Friday, the annual post-Thanksgiving shopping frenzy, rose at the fastest rate since 2007 to a record, though strategists suggested that spending was not necessarily a strong signal.

“The personal savings rate has declined, as personal consumption has run ahead of sluggish personal income, which is not sustainable in our view,” said rates strategists at Bank of America Merrill Lynch.

There are still plenty of worrying signs for the euro zone – and hence the global – economy. Moody’s has released a gloomy report on the euro zone crisis, warning that “the probability of multiple defaults (in addition to Greece’s private sector involvement programme) by euro area countries is no longer negligible”.

According to Daiwa Capital Markets in London, yesterday’s improvement in sentiment “looks set to be short-lived”. The real test of market confidence will come in bond auctions from euro zone countries hoping to raise about €17 billion. Markets will also be looking ahead to the US non-farm payroll report on Friday.

The first auction got away relatively smoothly, with Belgium selling €2 billion yesterday. Yields for the benchmark 10-year bond were 5.659 per cent, up from 4.37 per cent at the previous auction in October. It is a marker of how grim general market sentiment has become that this result, which took Belgian yields significantly closer to levels analysts consider to be unsustainable in the long run, was considered successful and did not interrupt the broader market rally.

Later this week there are more critical auctions, with Italy planning to raise as much as €8 billion today, followed by France and Spain on Thursday.At the close the FTSEurofirst 300 Index of top European shares rose 3.5 per cent, the biggest one-day gain in a month. France's CAC 40 and Italy's FTSE MIB were among the strongest performers, up 5.5 and 4.6 per cent respectively. – Additional reporting Financial Times Limited 2011/Reuters