LONDON — European shares jumped to one-week highs on Friday after euro zone leaders agreed to take action to bring down Italy's and Spain's borrowing costs, surprising investors who had expected little from their two-day summit.
The FTSEurofirst 300 had risen 1.6 percent to 1,011.09 by 1042 GMT, after falling 0.5 percent in the previous session, taking it back up to levels last seen on June 21.
Euro zone banks, which have a big exposure to sovereign debt, put in a strong showing, rising 4.6 percent.
The market has had a torrid few days, dropping nearly 3 percent on expectations the summit – the 20th time EU leaders have met to try to resolve the debt crisis since it began in Greece in early 2010 – would yield few concrete measures.
But the leaders agreed that euro area rescue funds could be used to stabilise bond markets without forcing countries that comply with EU budget rules to adopt extra austerity measures or economic reforms.
While the summit news has spurred a bounce, addressing immediate concerns for stressed economies, the relief, more pronounced given the general expectation for disappointment, could prove temporary given the scale of the region’s problems.
“Stocks are not exactly rising at the moment – they opened with an upside gap, and that’s it for now. The euro zone is not dead, people are relieved,” said David Thebault, head of quantitative sales trading, at Global Equities, in Paris.
“We’re slowly moving towards euro bonds, and the way policymakers communicate and manage market expectations is getting much better. All in all we’re making progress, but still no game changer.”
Mike McCudden, head of derivatives at Interactive Investor, concurred: “Investors are right to react positively as the ramifications of this 11th hour deal should pave the way for the fiscal, banking and political union markets are calling for.”
“In the short term expect volatility to remain as the economic situation in the euro zone remains deeply troubled, but at least some solid progress has been made.”
The Euro STOXX 50 volatility index, Europe’s main gauge of anxiety, known as the VSTOXX, shed 9 percent as investor appetite for risky assets improved on Friday.
Traders said the market focus was now shifting to a European Central Bank meeting next Thursday, with many in the market betting on a rate cut which would prove supportive to equities.
“We’re simply lurching from one short-term event to another short-term event and we anticipate what might happen, analyse what’s going to happen, price it into the market and then move onto the next event,” Andrew Milligan, head of global strategy at Standard Life Investments, said.
“We’re therefore just zig-zagging our way, and will for the foreseeable future. Next week we’re expecting the ECB to do ‘something’, and it will help, but it’s very unlikely that the ECB’s going to come out with the ‘big bazooka’.”
UK banks managed a relatively modest 0.9 percent rise, weighed by news Barclays, HSBC, Lloyds and RBS have all agreed to pay compensation to customers they misled about interest rate hedging products, following an investigation by Britain’s financial regulator.
