Markets rally as Wall St gives deal benefit of doubt

MARKET REACTION:FEARS THAT EU leaders had not done enough to tackle the region's sovereign debt crisis weighed on equities earlier in the session, but a strong rebound on Wall Street helped push global equities and the euro up.

Trading remained volatile as investors struggled to figure out whether they are pleased or disappointed with the outcome of the European summit in Brussels.

But gains were solidified after the release in the US of a report showing consumer confidence beat analysts’ estimates. A Reuters report that China planned a new $300 billion vehicle to invest in Europe and the United States also buoyed investor sentiment.

Yields on Italian debt rebounded and fell below the 7 per cent threshold seen as unsustainable. However, traders said frequent European Central Bank purchases offset disappointment over the prospect for a quick end to the crisis.

Led by Germany and France, 26 of the 27 nations in the European Union agreed after a two-day summit to pursue tighter integration with stricter budget discipline in the euro zone. Britain said it could not accept the proposed EU treaty amendments.

European and US shares surged more than 1 per cent, recouping most of Thursday’s losses as investors saw merit in the EU deal.

“Some were hoping for a bigger deal, but we’re seeing a lot more meat behind the effort with these measures,” said Dennis Wassung, portfolio manager at Cabot Money Management in Massachusetts.

But some analysts warned that EU leaders had failed to deliver a convincing answer to investors worried about their ability to tackle growing debt crises in Italy and Spain.

“Let’s hope this is the one that resolves the crisis, but I think the gains are only a relief rally,” said Andy Lynch, fund manager at Schroders, which manages $307.93 billion.

Adrian Pankiw, a strategist at Henderson Global Investors in London, said investors had been “underwhelmed” by the result.

“I don’t think anyone thinks this is over,” he said, adding: “There hasn’t been a disastrous collapse. We’ve averted that, even if only temporarily.”

But Mr Pankiw said it appeared the markets might be able to limp out 2011 without too much additional damage, because “there’s no desire to take large positions as we head into the end of the year”.

The euro has exemplified the uncertainty, hitting a session low of $1.3282, before bouncing to a high of $1.3433. It is currently up 0.2 per cent at $1.3376.

Some traders remain worried that, although the European Central Bank trimmed interest rates on Thursday and unveiled a range of measures designed to support the euro zone financial system, dissent over the bloc’s sovereign bond complex will prevent aggressive central bank intervention.

“The [EU] plan seems to address longer-term concerns about budget deficits and near-term concerns about banking sector liquidity. However, it fails to address the near-term stress in sovereign debt markets that can only be assuaged by more aggressive ECB bond purchases. Indeed, rising Italian and Spanish bond yields highlight some of the market’s disappointment in the plan,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Trading in European bonds see-sawed, with Italian 10-year bonds, investors’ favoured stress gauge, initially following Thursday’s surge to trade as high as 6.56 per cent. Yields fell later and were 12 basis points lower at 6.31 per cent.

In the US Treasury markets, the yield on the 10-year note jumped seven basis points to 2.04 per cent.

The FTSEurofirst 300 index of top European shares rose 1.3 per cent to close at 985.81 points. In Dublin, the Iseq closed 0.75 per cent stronger. The Dow Jones industrial average was up 187.62 points, or 1.56 per cent, at 12,185.32. The Standard Poor’s 500 Index was up 21.46 points, or 1.74 per cent, at 1,255.81. The Nasdaq Composite Index was up 51.32 points, or 1.98 per cent, at 2,647.70.

Banks, which have been pressured by the uncertainty of the debt crisis, rallied. – (Reuters / The Financial Times Limited 2011)