European stocks posted their highest close in two-and-a-half weeks yesterday, cheered by strong US data and the European Central Bank’s commitment to low interest rates to fuel economic recovery.
The US services sector grew at its fastest pace in almost eight years, according to Institute for Supply Management data, offering fresh proof of a pick up in the world’s biggest economy.
Data has also been improving in Europe, but policymakers there signalled the outlook for rates had not changed since July and that, despite improvements, risks to the economy remained to the downside.
The bank’s statement after its September meeting said it was ready to cut interest rates or pump more money into the eurozone economy if necessary to bring down money market rates it says have been higher than warranted.
Low interest rates make equities look attractive relative to bonds, while reducing the borrowing costs for companies themselves and stimulating domestic demand by encouraging consumers and businesses to spend rather than save.
The FTSEurofirst 300 closed up 0.7 per cent at 1,223.68 points, its highest finish since August 19.
“It’s a bit more reassurance from the policymaking body in Europe and, at the same time, strong data from the States... so you can see why the markets are up,” said Graham Bishop, equity strategist at Exane BNP Paribas.
Banks – arguably the most direct beneficiaries of ECB stimulus – added the biggest sector boost.
Telecoms were another top gainer, with Telecom Italia surging 8.4 per cent on renewed deal speculation against a backdrop of rising merger activity in Europe.
Egyptian tycoon Naguib Sawiris, AT&T and America Movil have made contact with the core investors in the Italian firm who want to sell their shares, a source close to the situation said.
Gains on the broader market, however, were capped by ongoing concerns over Syria, with talks on how to deal with the civil war there set to dominate the G20 meeting of the world’s major nations.
Activity in September put options on EuroSTOXX 50 – which give the right to sell the index and are thus used to position for market weakness – on the Eurex exchange was nearly twice as high as for call options.
Adding to investor caution were expectations that the US Federal Reserve will start to scale back its asset purchases stimulus programme this month – for which jobs numbers on Friday may prove an important sign.
Tighter US policy could also prove beneficial to European equities, including through currency impact, some say.