European stock markets and the euro pushed higher while government financing costs eased after EU nations signalled yesterday they would adopt a tough new fiscal compact to resolve the debt crisis.
London’s FTSE-100 index of top companies rose 0.83 per cent to 5,529.21 points, while in Frankfurt the DAX-30 added 1.91 per cent to 5,986.71 points and Paris’ CAC-40 jumped 2.48 per cent to 3,172.35 points. Milan soared 3.37 per cent and Madrid gained 2.23 per cent. The euro rose to $1.3375 from $1.3341 late in New York on Thursday.
On the eurozone bond market, yields on French, Italian and Spanish debt eased, while those on 10-year German bonds rose slightly.
Stocks and the euro initially dipped after Britain’s shock decision to veto a new EU treaty to tackle the eurozone debt crisis, but then pushed into positive territory. Positive US trade and consumer confidence data helped sustain the rebound.
Feuding European Union leaders failed yesterday to agree a new treaty to solve the sovereign debt crisis after Britain wielded its veto when it did not get opt-outs on financial regulations it had sought to protect businesses in London.
However, the other 26 EU members agreed to adopt the measures to enforce tough budget discipline in a “fiscal compact” with automatic sanctions, leaving Britain out in the cold.
A clash between Europe’s big three, non-euro Britain versus France and Germany did not prevent a pledge to pump €200 billion ($267 billion) into IMF coffers to help the eurozone, which is struggling to boost its rescue fund.
“The agreement isn’t complete, there are a few things lacking on the fiscal side, but it shows the political will of the leaders to put the eurozone into order,” said Frederic Rozier of Meeschaert Gestion Privee asset managers.
With several elements of uncertainty removed, the markets may be able to hold onto their own for the next couple of weeks as little major news is expected, he added.
The markets will remain on their guard however as Standard & Poor’s said it would decide quickly after the summit whether or not to downgrade eurozone countries.
However, Tangi Le Liboux at Aurel BGC stock brokers said “there is no reason why the official announcement will have more of an impact than the threat” to downgrade the ratings as markets had largely priced in lower ratings on eurozone countries.
US stocks also advanced, with the Dow Jones Industrial Average up 1.34 per cent to 12,158.87 points in midday trade.
The broader S&P 500 rose 1.46 per cent to 1,252.34 points, while the Nasdaq Composite gained 1.45 per cent to 2,634.00 points.
“Initial strength came amid reports of progress at the latest eurozone summit. A consensus on every agenda item has reportedly eluded members, but that’s not so surprising given the dissension displayed by so many eurozone officials during efforts of the past few months,” said Briefing.com.
As part of a new “fiscal rule”, countries would promise to keep their so-called “structural deficit” – excluding one-off items and the effects of the economic cycle – to 0.5 per cent of GDP annually.
However, no agreement was struck on the controversial topic of pooling euro area debt, or eurobonds, seen by many analysts as the best way out of the crippling financial crisis the bloc finds itself in.
And a German-led drive to impose private-sector losses on bondholders in future bailouts has been abandoned.
Herman Van Rompuy, the EU’s president, said this policy, which he admitted had had “a very negative effect on the debt markets” was “officially over”.
However, analysts were concerned that the new fiscal rules would not be sufficient to induce the European Central Bank to intervene more heavily to buy the bonds of debt-mired countries, bringing down their borrowing costs.
“As long as the ECB maintains its ‘holier than thou’ attitude, the risk remains grave that the eurozone could fall into a worsening crisis with a deeper recession and mounting political risks early next year,” said Holger Schmieding at Berenberg Bank.
Asian stock markets closed lower yesterday, with Tokyo dropping 1.48 per cent and Hong Kong slumping 2.73 per cent. Sydney earlier ended with a loss of 1.82 per cent.