Tuesday 21 November 2017

European shares boosted by Cypriot rescue deal

EUROPEAN shares clawed back most of last week's losses on Monday after Cyprus secured a bailout deal to avert a collapse in its banking system and a possible exit from the euro zone.

Early on Monday, Cyprus clinched a last-minute deal with international lenders on a rescue without which the Mediterranean island would have faced financial meltdown and potentially been pushed out of the euro zone.

Francois Duhen, a strategist at CM-CIC Securities in Paris, said the deal underpinned investor confidence that European authorities are committed to saving the euro, but he cautioned the bailout was not all good news for investors.

"It's good (the deal) is there," Duhen said. "It was expected we would have a short-term fix (but) some long-term worries about the balance between public debt and growth will remain. It's underfinanced according to us."

He added a decision to make senior bondholders in Cypriot banks take a hit sets a worrying precedent and may act as a drag euro zone banking shares once the euphoria over the averted danger wears out.

Euro zone banks, which own a large part of the region's sovereign debt and would have suffered from the fallout of a Cypriot default on the wholesale funding market, jumped 1.6pc.

The euro zone Euro STOXX 50 index was up 34.6 points, or 1.3pc, at 2,716.25 points in early trade, recouping most of the 44.1 points dropped last week, its worst fall since November.

Justin Haque, a pan-European broker at Hobart Capital Markets, said the index was likely to rise back to its recent high of 2,750 points before the Easter break starts on Friday as fund managers squared positions into the end of the first quarter, a practice known as window-dressing.

"This week is a short week and the end of the quarter so there's going to be a massive amount of window dressing," Haque said.

"Long-only (funds) have to keep invested as they get paid on the performance numbers as of Thursday and hedge funds just go along with it."

The cost of insuring against swings in euro zone stocks, as measured by the Euro STOXX 50 volatility index or VSTOXX, fell 16.4pc.

The VSTOXX, which gauges the cost of options on euro zone blue chips and tends to move inversely to the Euro STOXX 50, was down around 40pc since the European Central Bank president Mario Draghi pledged to save the euro in July 2012.

The Euro STOXX 50 was up 27pc over the same period of time and 3pc since the turn of the year as investor confidence in the euro zone grew.

Ebullient equity markets in the first two months of the year helped Aberdeen Asset Management pull in €3.5bn of net new money, the company said on Monday, sending its shares 4.3pc higher.

Investors have been chasing higher returns on equities as yields on debt fell as a result of bond-buying programmes by central banks, especially the U.S. Federal Reserve and the ECB.

Annual returns on euro zone shares, as measured by their dividend yield, were 8.7pc higher than those offered by Germany's 10-year bonds, Datastream data showed.

Reuters

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