European and US shares rose yesterday with intense speculation over a more ambitious bailout fund for the eurozone and an orderly Greek default, though lack of details and denials by officials kept trading volatile.
The euro dropped on cautious trading despite optimism that a more ambitious eurozone policy was emerging. Asian equities fell sharply earlier yesterday.
“After opening lower the main European benchmarks have seen downside tempered by talk out of Europe about the consideration of bank recapitalisations, a 50 per cent Greek default and an increase of leveraging up of the EFSF bailout fund,” Michael Hewson at CMC Markets said.
European stocks rose with Frankfurt’s DAX index of leading shares up 2.87 per cent to 5,345.56 points on better-than-expected business climate data.
In London, the FTSE-100 index closed up 0.45 at 5,089.37 points, while in Paris the CAC 40 gained 1.75 per cent to 2,859.34 points.
Elsewhere in Europe, Milan jumped 3.32 per cent, Madrid 2.56 per cent, Zurich 1.93 per cent, Amsterdam 1.93 per cent and Lisbon gained 0.51 per cent.
US stocks were up after posting their worst week since October 2008. In midday trade, the Dow Jones Industrial Average rose 1.43 per cent to 10,925.99, the broader S&P 500 advanced 1.12 per cent to 1,149.21, while the tech-heavy Nasdaq Composite slid 0.26 per cent to 2,489.58.
European equities had fallen sharply at the open but rallied on speculation, later denied, that France was drawing up plans to re-capitalise the country’s ailing banks amid persistent worries over their exposure to Greece.
In London, the euro ended lower $1.3487, from $1.3503 on Friday and after sinking to $1.3363 in early trade. It was also stable against the yen at 103.01 yen after hitting a 10-year low at 101.94 yen in Asian trade.
The dollar slid to 76.38 yen from 76.50 last Friday.
Analysts at Capital Economics in London said “talk of radical new measures to bail out highly indebted eurozone governments and shore up banks throughout the region suggests that policymakers might finally be considering the bold steps that would be required to save the euro”.
“But the plans might not ever come to fruition and, even if they do, they do not address all of the fundamental problems facing the most indebted economies,” they said.
Coming out of the weekend, investors were unimpressed by a commitment from G20 finance chiefs that they would take strong action amid fears Greece will almost certainly default on its debts.
“European equities are stronger despite disappointment following the G20 meeting,” said David Morrison, an analyst at GFT trading group.
“However, traders are piling back into banks and other financial stocks on hopes of a huge coordinated rescue package which will ring-fence Greece, Ireland and Portugal and prevent contagion to the rest of the eurozone. But no details emerged and the “market is rallying on unsubstantiated rumours,” Mr Morrison added.
Greece awaited the arrival of European Union and IMF experts expected to resume an audit of plans to cut the public deficit and reform the economy, but Brussels said the trip was not yet on the cards.
The EU and IMF will decide whether to release the next slice of rescue funds without which Greece will be unable to pay its current bills beginning in mid-October.
On Thursday, the German Parliament votes on whether to allow an expansion of the scope and size of Europe’s bailout fund, the European Financial Stability Facility.
Once approved by all 17 eurozone members, it is hoped that the crisis would stop spreading to Spain and Italy.
But the European Commission refused to comment speculation that the fund would be boosted beyond the amount already agreed. Denials of another increase came in from The Netherlands, Austria and from German Finance Minister Wolfgang Schaeuble.
The little hard data there was came from Germany where the closely-watched Ifo business climate index fell to its lowest level in more than a year, as companies become increasingly weighed down by the debt debacle in the eurozone.
Economists had been pencilling in an even steeper decline which helped explain the shares jump in Frankfurt.