Paris - European stocks rose early on Monday, adding to last week’s 8.5% jump on growing hopes of a comprehensive solution to the eurozone debt crisis as French President Nicolas Sarkozy and German Chancellor Angela Merkel meet ahead of a key summit.
Italy’s fresh €30bn package of austerity measures also eased tensions surrounding the country’s finances and sparked a rally in Italian shares, with Milan’s FTSE MIB index up 3.1% while Italian 10-year bond yields dropped towards 6%.
Banco Popolare surged 7%, UniCredit 5% and Enel was up 3.6%. In afternoon trade the FTSEurofirst 300 index of top European shares was up 1% at 994.84 points, a level not seen in five weeks.
“Markets now seem to want to believe that Merkel and Sarkozy will come out with a common point of view and a lot of austerity and structural measures to bring down the debt and increase competitiveness,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
“And when you listen to their speeches, it looks like the points of view which were far apart clearly have come closer together. If they manage to come to an understanding, they still have to sell some of these very unpopular measures to the rest of Europe. And this would open the door for the European Central Bank to get more involved.”
Shares in financial institutions led the gains, with ING Groep up 3%, BNP Paribas climbing 5.5% and BBVA up 2.6%.
The STOXX eurozone banking index has surged 23% since tumbling to a near-three year low in late November.
Commerzbank bucked the trend, sinking 7% after announcing the buyback of €600m of hybrid capital instruments in a bid to meet European capital requirements without asking for more state intervention, but the move was seen as too timid by investors.
The eurozone’s blue chip Euro STOXX 50 index was up 1.5% at 2 377.67 points, partly filling a downward gap on the chart left open in early November.
The benchmark index was reaching "overbought" territory, with its nine-day relative strength index at 68.5, signalling the index was poised for a short-term pullback. A reading of 70 and above is considered "overbought".
Despite Monday’s gains on the market, the Euro STOXX 50 volatility index - Europe’s yardstick of investor sentiment known as the VSTOXX - was steady at 35.7, signalling investors’ hesitation about piling up more risky assets before the outcome of the Merkel-Sarkozy meeting.
Ripe for pullback? Kepler Capital Markets trader Patrice Perois said the market looked ripe for a pullback after its best weekly gain in three years.
“There are still significant differences between Sarkozy and Merkel, so we’re in for a volatile week, and the risk is that any kind of disappointment could trigger a pullback,” he said.
“But the medium term looks relatively positive. The Italian government is really regaining credibility, and that’s very important to restore confidence.”
Meeting in Paris on Monday ahead of a key European Union summit later in the week, Sarkozy and Merkel are under pressure to iron out their differences on how to centralise control of eurozone budgets to resolve the region’s debt crisis.
The two leaders will try to reach common ground on measures to boost coercive budget discipline in the eurozone, likely via EU treaty change, which they want all 27 EU leaders to approve at Friday’s summit.
“Too many times before, eurozone leaders have pledged their determination to end the crisis, but end up merely fudging the issue and delaying any decision until later,” said IG Markets analyst Chris Beauchamp.
“The fear now is that this week will turn out the same way, with fine words but little action.” Around Europe, UK’s FTSE 100 index was up 0.7%, Germany’s DAX index up 0.9%, and France’s CAC 40 up 1.4%.