European stocks and the euro rebounded sharply yesterday after days of sustained heavy losses, with investors snapping up bargains despite a welter of what would normally be bad news.
IMF concocting some sort of elaborate bailout plan for Italy
Dealers said a report that Italy was to get an International Monetary Fund bailout – later flatly denied – was taken positively as offering a way out for one of the most heavily indebted eurozone states.
Even with the IMF news lead, Italy still had to pay sharply higher rates to raise fresh funds yesterday, suggesting that investors may have had enough of bonds for the moment.
A warning from the OECD that the eurozone debt crisis could plunge advanced economies into deep recession and even depression, with waves of bankruptcies and wealth destruction in Europe, also seemed to have had little impact.
Last but not least, a Moody’s warning that the debt crisis threatened the debt ratings for all European states, strong or weak, failed to generate much commotion as investors ploughed into now cheap markets.
On the positive side, the markets cheered strong US retail sales after the Thanksgiving holiday, suggesting that the US economy may be doing better than expected, with the data driving strong Wall Street gains as well.
In London, the FTSE-100 index of top companies rose 2.87 per cent to 5,312.76 points. In Paris, the CAC-40 soared 5.46 per cent to 3,012.93 points and in Frankfurt the DAX 30 jumped 4.60 per cent to 5,745.33 points.
Milan also gained 4.60 per cent and Madrid advanced 4.59 per cent, while other markets posted similar strong gains.
The rally was “assisted by rumours that the IMF are concocting some sort of elaborate bailout plan for Italy,” said Simon Denham, head of Capital Spreads trading group in London.
Investors also welcomed the “eurozone stepping up a gear and exploring the idea of the ECB playing a critical role in sovereign debt intervention,” Mr Denham said, referring to discussions led by France and Germany on the role of the European Central Bank.
Some dealers cautioned against getting carried away with the upturn as the underlying eurozone debt problems remain firmly in place.
Michael Hewson, market analyst at CMC Markets, said EU leaders have in the past promised much but then failed to deliver.
“Given that we have been down this route a number of times before, with respect to action from EU leaders, you could argue that there is an element of naivety in this rebound and as such the potential for disappointment remains quite high,”Mr Hewson said.
Joshua Raymond at City Index made a similar point.
“This is not the first time the markets have heard claims of newfound vigour and progress being made behind the scenes only to be let down in the eleventh hour,” he said in a note.
“Too many times have investors been let down by strong rhetoric and little action by Europe’s leaders,” he added.
The euro meanwhile was firmer at $1.3337, up from $1.3240 in New York late Friday, while the dollar rose to 77.99 yen after 77.72 yen.
In New York, stocks opened sharply higher and continued that way, with the blue-chip Dow Jones Industrial Average up 2.78 per cent while the tech-heavy Nasdaq jumped 3.58 per cent at around 1700 GMT.
“Rumours are swirling that Germany and France are in discussions to find additional ways to shore up the struggling eurozone,” said Karee Venema of Schaeffer’s.
“Wall Street is looking to shake off last week’s drubbing,” Venema said, of last weeks loss of 4.8 per cent.
In Asian trading earlier yesterday, the IMF Italy report brought solid gains.
Tokyo rose 1.56 per cent, Sydney jumped 1.85 per cent, Hong Kong added 1.97 per cent while Shanghai edged up 0.12 per cent.