Stocks surge on hopes euro fix will solve ongoing crisis
Euro climbs above $1.40 for the first time since September
Published 28/10/2011 | 05:00
EUROPE'S latest attempt to fix its debt crisis triggered a strong rally on world stock markets and strengthened the euro.
Investors were heartened by the measures announced by Europe's top politicians, with further details to be announced next month.
Meanwhile, the IMF's top economist said Ireland had "turned a corner" and the economy was heading in the right direction.
Olivier Blanchard said he was "fairly confident" that Ireland would be able to return to the bond markets next year, or in early 2013, and raise money at rates of interest that were not too penal.
Mr Blanchard, who was in Dublin to speak to students at Trinity College, said that while the signs for the economy were pointing in the right direction, unemployment was still much too high and production was too low.
European stocks rallied strongly, particularly bank shares, on hopes that the deal will prevent further contagion of the credit crisis to other big European economies.
Benchmark stock indices across Europe were all up strongly yesterday, with most markets posting a 5pc rise in share values. The news was also well received across the Atlantic with the S&P's 500 Index making strong gains to extend the biggest monthly rally in US stocks since 1987.
The euro surged above $1.40 for the first time since the beginning of September as it was buoyed by the deal as investors expressed relief that the region's leaders had finally come to an agreement to attempt to resolve the sovereign debt crisis.
Goldman Sachs revised its forecasts for European share prices on the back of the latest developments. It expects the Stoxx Europe 600 index to rise to 255 over the next three months, but it cautions that the risks surrounding this forecast remain high.
It still believes the threat to Europe's banking systems remains high, despite measures to strengthen the banks by ensuring they have more capital.
French banks, which have been weighed down by worries about the extent of their exposure to Greek debt, all made gains yesterday. Societe Generale climbed 15pc and BNP Paribas pushed forward by 16pc. US banks also benefited with JPMorgan Chase, Citigroup and Bank of America shares all up more than 6pc, with better-than-expected corporate earnings providing an additional boost.
"Europe has done enough for the time being," Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock said yesterday.
His firm oversees $3.3 trillion (€2.3tn) as the world's largest asset manager. "It will remove near-term pressure," he said. "In the US, the GDP report was decent and it was encouraging to see the consumer hold. The fear of a recession is fading."
The ECB also helped to boost market sentiment by buying Italian and Spanish government bonds. Italy's bond yield dropped to 5.8pc, while Spanish yields drifted down to 5.28pc.
"The moves were clearly better than the markets anticipated, it seems to have cut out some of the risk," Jeffrey Palma, global equity strategist at UBS said.
"This certainly gives some sort of clarity to what is going on in Europe, but we'll probably have other iterations to come."
But some analysts cautioned that, until sovereign debt markets recover, uncertainty about a sustained recovery would continue.
"If we're not seeing the sovereign debt markets turn around, that is a red flag," Michael Darda, the chief economist and chief market strategist at MKM Partners, said. (Additional reporting Bloomberg)