European stocks paused yesterday around five-and-a-half year highs, but rising confidence that peripheral euro zone economies are starting to recover from the region’s debt crisis helped markets there extend a rally.
Trading volumes on Portugal’s PSI 20 benchmark share index were seven times the daily average, while turnover on the main Madrid and Dublin indices were more than twice their daily averages, according to Thomson Reuters data.
Peripheral euro zone stocks have seen hefty inflows recently, as the economies hit hardest by the bloc’s prolonged crisis begin to show signs of improvement.
Bumper demand for Ireland’s first bond sale since it exited its EU/IMF bailout helped push down euro zone government bond yields on Tuesday and lifted expectations that Portugal will be able to exit its EU/IMF bailout programme this year as planned.
The broad FTSEurofirst 300 index of top European shares ended 0.1 per cent higher at 1,321.19, just shy of a five-and-a-half year high hit earlier in the session.
The euro zone’s blue-chip Euro STOXX 50 index ended flat, while the UK’s FTSE 100 index shed 0.5 per cent, Germany’s DAX index dipped 0.1 per cent and France’s CAC 40 ended down 0.04 per cent.
The mood was brighter in the euro zone periphery, with Spain’s IBEX gaining 0.7 per cent, Portugal’s PSI 20 up 1.4 per cent, and Greece’s ATG index adding 3.3 per cent.
“Overall, things are improving in the euro zone. Spain’s recovery is gaining traction as all the efforts the country has made are starting to pay off,” said Claudia Panseri, head of equity strategy at Societe Generale Private Banking, which has 84 billion euros ($114 billion) of assets under management.
“We’re particularly positive on the shares of euro zone banks that already meet Basel III capital ratios. They have already significantly reduced their leverage and strengthened their balance sheets.”
The STOXX euro zone bank index gained 1.8 per cent, extending its rally so far this year to 6.2 per cent, about a quarter of its gains for the whole of 2013.
Spain’s Banco Popular jumped 8.9 per cent, Italy’s Intesa Sanpaolo rose 2.2 per cent and Portugal’s Millennium BCP gained 2.7 per cent.
“It’s all about the peripheral yields falling, that’s what triggered the rally in equities. Investments are flowing in, which also explains why the euro remains so strong,” said Global Equities’ head of quantitative sales trading David Thebault.
Spanish 10-year bond yields hit new four-year lows of 3.78 per cent yesterday after the Irish bond sale.
“This is all based on the anticipation of an economic recovery, but it will take a good six months to see if there’s a turnaround in the real economy,” Thebault added. “We’re not there yet.”
Five sessions into the new year, the FTSE 100 is down 0.4 per cent, the DAX down 0.6 per cent, and the CAC 40 down 0.8 per cent. Meanwhile, the IBEX is up 3.4 per cent, the MIB up 2.5 per cent and the PSI 20 up 7.6 per cent.