European shares bounce back after US jobs data

European shares ended sharply higher yesterday, reversing losses after US jobs data indicated the economy was growing, but probably not enough to prompt the Federal Reserve to wind down its stimulus measures.

The rally was broad-based, with banking shares among the top blue-chip gainers. Deutsche Bank added 3.8 per cent, Credit Agricole rose three per cent and UBS gained 3.4 per cent.

The FTSEurofirst 300 index of top European shares closed 1.3 per cent higher at 1,194.26 points, erasing a portion of the week’s losses, while the euro zone’s blue-chip Euro STOXX 50 index added 1.8 per cent, to 2,724.08 points.

“A lot of people have been in ‘risk-off’ mood this week, and we could see them coming back in the next days. Just look at the volatility index,” said David Thebault, head of quantitative sales trading, at Global Equities.

The Euro STOXX 50 Volatility Index, known as Europe’s ‘fear gauge’, tumbled 10 per cent yesterday, signalling a sharp drop in investors’ risk aversion.

Data showed the US economy added 175,000 jobs in May, just above the median forecast in a Reuters poll. The unemployment rate though ticked higher to 7.6 per cent.

European stocks surged between late-April and late-May, boosted by massive liquidity injections from central banks, including the Fed’s buying of $85 billion per month in Treasuries and mortgage-backed securities to try and boost economic growth.

The rally lost steam late last month, however, after a batch of robust data sparked speculation the Fed could soon start to trim its quantitative easing programme.

Investors have been particularly nervous since Fed Chairman Ben Bernanke last month said the central bank may decide to trim its programme within the next few Fed policy meetings if data shows the economy is gaining steam.

Around Europe, the UK’s FTSE 100 index added 1.2 per cent yesterday, Germany’s DAX index gained 1.9 per cent, and France’s CAC 40 rose 1.5 per cent.

FXCM analyst Vincent Ganne warned that yesterday’s rally was a technical bounce after the sharp pull-back of the past two weeks, and the rebound could be short lived.

“This rally is fuelled by short sellers booking their profits. The correction phase on the downside is probably not over yet,” he said.

Charts show that despite yesterday’s rally, both the Euro STOXX 50 and the FTSEurofirst 300 remained below negative trendlines started in late May, a technical signal that the indexes’ two-week retreat could resume next week. (Reuters)