By Richard Hubbard
LONDON — Strong demand at Spanish and French government bond auctions added to a buoyant mood in stock markets on Thursday and lifted the euro to a two-week high against the dollar as fresh steps to contain the European debt crisis boosted risk appetite.
Key to the stronger sentiment was news that the International Monetary Fund would seek to more than double its war chest by raising US$600 billion to help countries deal with the fallout from the crisis.
Greek negotiators are also set to meet private creditors for a second day of talks aimed at reaching a bond swap deal, crucial if the government is to avoid a chaotic default when 14.5 billion euros of bond redemptions fall due in March.
“The newsflow we are seeing is reasonably encouraging for risk, with the IMF headlines yesterday and hopes growing over the Greek restructuring talks,” said Tom Levinson, currency strategist at ING.
The euro was up around 0.2% against the dollar at $1.2885, near its two week high of $1.2908. European shares made a strong start, tracking robust gains made in Asia.
The FTSEurofirst 300 index of top European shares was up 0.2% at 1,036.95 points to trade near 5-1/2 month highs. The main index for bank stocks was up 3.7%, and topped the gainers’ list, following encouraging results from Goldman Sachs. Bank of America Corp results are due later.
Global stocks as measured by the MSCI index were up 0.45% at 312.34, the highest level since Oct. 31.
Stock markets have been performing well since the start of the year, bolstered by good economic numbers from the United States and the extra cash sloshing around the market due to central banks’ efforts to bolster banking liquidity.
“If you are a long-term investor, there are attractions in the equity market as corporate balance sheets are robust in many cases and cash flows are reliable,” said Jeremy Batstone-Carr, strategist at Charles Stanley.
BOND AUCTIONS GO WELL
Both Spain and France were downgraded by ratings agency Standard and Poor’s last week, but the auction results were evidence that investors were becoming less nervous about the ability of eurozone government to refinance their debts.
Spain sold 6.61 billion euros (US$8.5 billion) compared to the planned 4.5 billion and demand for the 10-year bonds in the sale was more than twice the amount on offer. France sold 7.97 billion euros at lower yields to previous auctions.
“These results are bullish for both Spain and the broader periphery and stand to further underpin the ongoing ’risk-on’ tone,” Richard McGuire rate strategist at Rabobank said.
“Potential snags as regards Greece’s (private sector) deal and Italy’s surge in redemptions from February both, however, leave a question mark over how sustainable this positive trend will be. For now, though, the glass half-full brigade have the upper hand,” he added.
In commodity markets Brent crude oil rose above $111 on Thursday as risk appetite improved on hopes the euro zone debt crisis was slowly being resolved and on signs of steadier global economic growth.
Spot gold also edged higher on Thursday, on course for a fourth session of gains, rising 0.3% to $1,663.99 an ounce and approaching a one-month high of $1,667.41.
© Thomson Reuters 2012