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Markets rally ahead of key EU summit

Following the violent protests that have emanated from Athens in recent days, markets welcomed the passing of an additional austerity package by the Greek Parliament last night, measures that were aimed at cutting civil service expenditure and increasing tax revenue. A further boost to sentiment was provided in a release from Sarkozy and Markel, the French and German leaders managing to calm some nerves after the markets sold off yesterday having pared back their expectations for a resolution at this weekend’s EU summit. Equity markets were reassured by comments which suggested a comprehensive and wide-ranging eurozone debt deal would be delivered no later than Wednesday next week.

It was however evident than not all investors were convinced by the extended deadline, the Euro falling slightly against the dollar and Swiss franc and safe heaven government bond yields falling with those of the peripheral nations rising. Italian 10 year debt rose above 6% again today, signifying borrowing costs that are widely regarded to be unsustainable. In further signs of stress, the yield spread between French and German 10 year bonds rose to around 1.2%, suggesting the eurozone’s troubles are taking their toll on Europe’s second largest economy. Nonetheless, European equities began the day in positive territory, the UK led higher by financials and miners that rose with the price of their underlying commodities. The Euro and peripheral bonds reversed their earlier losses and equities continued their gains, the FTSE 100 reaching 0.5% by midday but continuing higher to peak above 2%.

Xstrata was the best performer within the FTSE 100, benefiting in response to an upgrade from neutral to overweight by HSBC. The bank was evidently still positive on miners, stating that high iron ore prices were already priced in and copper was still being bought by the Chinese. Whilst BHP Billiton was downgraded on concerns over its significant capital expenditure plans, Xstrata was singled out due to its recent underperformance. Shares in the general miner put on 6.0% to finish at 949p.

The FTSE 100 finished the day up 1.9%, putting on almost 104 points to close at 5488. With a strong rally into a weekend which will see the second bailout of Greece, EFSF expansion and bank recapitalisation discussions on the agenda, many will be intrigued to see how financial market’s react as they deliver their verdict on Monday morning.

This was posted in Bdaily's Members' News section by John Dance .