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Markets rally despite intangible EU deal

The much awaited headlines from the EU summit were that the 27 leaders had found common ground in plans for the recapitalisation of banks and a 50% haircut for the private holders of Greek debt. There was also agreement over the expansion of the European Financial Stability Fund (EFSF), with a view to leveraging it up to have around €1 trillion worth of firepower.

The evidence of progress was sufficient to boost investor appetite, the general shift towards riskier assets ensured equities and commodities were buoyed, propping up the prices of miners and energy companies. Financial were however the main story, benefiting from news that the target for recapitalisation is lower than some may have anticipated. European banks saw strong gains, as did their UK peers who fared particularly well as their absence from the recapitalisation list hinted towards superior financial health. European indices were initially up over 4% and the UK’s FTSE 100 was higher by over 2%.

Despite the tangible relief, many commentators voiced concerns over last night’s outcomes, one analyst at RBC Capital stating in a research note that the summit was “long on intentions; short on details”. In particular questions remain as to how the ESFS will be leveraged as the two options on the table were not outlined in any depth. There was also concern as to whether all the private participants will sign up to the 50% haircuts bearing in mind that their contribution must be voluntary to prevent a credit event.

Despite this, the relief rally continued through the afternoon, supported by US economic data that showed that economic growth came in at an annualised rate of 2.5% in the third quarter of this year, in line with expectations and up considerably from the 1.3% figure between April and June. The UK’s stand out performer was Barclays, finishing up x% at x, although it had been above 20% at one stage. X and x occupied second and third place on the UK’s blue chip index, with the worst performers being those most defensive in nature, i.e. utilities and healthcare.

The FTSE 100 peaked at around 5750, before coming off its high towards the close, to finish up 160 points (2.9%) at 5714, a level not seen since the start of August and an amazing 16% gain in just three weeks. The CAC40 and DAX saw even greater gains, their gains of 6.25% and 5.3% respectively, helped by their relatively large weighting to financials.

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