European shares and the euro jumped yesterday as investors cheered a Franco-German pledge to shore up European banks in news that coincided with a cross-border dismantling of troubled lender Dexia.
At closing, London’s FTSE 100 index added 1.80 per cent at 5,399 points. In Frankfurt, the DAX rallied 3.02 per cent to 5,847.29 points and in Paris the CAC-40 climbed 2.13 per cent to 3,161.47 points.
Elsewhere in Europe, Milan rallied 3.67 per cent, despite news before the weekend that Fitch had cut credit ratings on Spain and Italy. Madrid shares increased by 1.07 per cent, Lisbon by 2.39 per cent, Zurich by 1.17 per cent and Amsterdam by 1.74 per cent.
The European single currency jumped to $1.3675 in London foreign exchange deals from $1.3375 late in New York on Friday. The dollar fell to 76.66 yen from 76.87 yen on Friday.
US stocks also soared on the Franco-German commitment to ring-fence Europe’s banks from the effects of the debt crisis.
In midday trade, the Dow Jones Industrial Average was up 2.46 per cent to 11,376.23 points. The broader S&P 500 rose 2.93 per cent to 1,189.35 points, while the tech-heavy Nasdaq Composite gained 3.09 per cent to 2,555.89 points.
Trade was thinner than usual with many businesses and US government services shut for Columbus Day.
Asian shares closed mixed with Sydney adding 0.92 per cent, while Hong Kong finished flat and Shanghai lost 0.61 per cent.
“Finally, a framework is being put in place on a European level, which is giving confidence to the markets,” asset manager at Barclays Bourse Renaud Murail said.
In a meeting on Sunday, French President Nicolas Sarkozy and German Chancellor Angela Merkel put on a united front and vowed a response to Europe’s debt and banking crisis within weeks.
The deadline for the response is an EU summit now to be held October 23 and the modalities are to be thrashed out until then in closed door talks.
The pledge came as Greece called yesterday for improved debt rollover terms from its private creditors at the end of talks with the EU and the IMF on an audit to unlock fresh loans, a plea sure to send further tremors to troubled banks. Mr Sarkozy said there would be “lasting, global and quick responses before the end of the month” amid growing fears of another crippling global credit crunch.
The pair’s efforts came before yesterday’s rescue of Franco-Belgian bank Dexia, whose shares were reopened to trading and immediately crashed by over 36 percent only to fully recover the losses less than an hour later. “The announcement that Merkel and Sarkozy have reached agreement on how to reinforce beleaguered eurozone banks is certainly adding some support” to stock markets, said analyst Chris Weston at trading group IG Markets.
“Stocks have been driven higher by expectations of an accord between France and Germany and a concrete deadline – the end of October – to get a comprehensive plan together to re-capitalise the banking sector and fundamentally overhaul the economic workings of the currency bloc,” said Kathleen Brooks, an economist at Forex.com trading group.