Low volumes behind jumps in shares

WORLD STOCKS rallied yesterday and the euro rose from a seven-week low as optimism grew that European leaders would come up with a new plan to resolve the region’s debt crisis ahead of a crucial meeting next week.

The cost of insuring eurozone government bonds against default also fell broadly.

European markets rose in early trade amid rumours that an IMF bail out was being prepared for Italy, while a warning by Moody’s that the rapid escalation of the region’s sovereign and banking crisis threatens the rating of all European government bonds and a similarly pessimistic view from the OECD about the euro zone failed to dampen sentiment.

The FTSEurofirst 300 index of top European shares rose 3.5 per cent to a provisional close of 939.91 points, the biggest one-day gain since October 27th.

However, the index is still down 5.6 per cent in November. The heavyweight banking sector contributed most to the index’s gain.

BNP Paribas rose 10.3 per cent. The Stoxx Europe 600 Banking Index rose 5.6 per cent, though it is still down 36.5 per cent in 2011, with several banks having had to write down the value of government bonds in the euro zone periphery.

Finance ministers of the 17-nation currency area meeting tonight are due to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets.

However, some strategists pointed to low trading volume and said recent weakness in the market, tempting buyers, was a major factor behind the surge in shares.

“Any kind of good news was always going to be taken as positive. There has been some bargain hunting going on. The market got oversold in the last few weeks and some of the most cyclical areas of the market seemed to be pricing in the worst fears,” said Erik Esselink, fund manager at Invesco Perpetual, which has €5 billion under management.

The MSCI world equity index jumped 3.2 per cent. The index is down roughly 15 per cent since January and more than 20 per cent since hitting a three-year high in May.

In the foreign exchange market, the euro was up 0.8 per cent to $1.3340, having climbed to almost $1.3400.

The euro zone crisis continued to drive activity in Dublin yesterday, with the Iseq taking part in the broader equity market rally which took place across global markets.

However, as was the case with the other main European markets, very low volumes were behind the big jumps in share price.

The vast majority of Irish stocks ended the session in positive territory, with the overall Index closing up more than 3 per cent higher.

Food company Aryzta one of the main movers rose after the company reiterated full-year guidance after a first-quarter update showed underlying revenue growth of 4.4 per cent.

Elan gained more than 3 per cent to €7.79 after the biotech company announced a research collaboration with the University of Cambridge.

As Bank of Ireland announced further details of deleveraging – the sale of loans to Japanese bank Sumitomo Mitsui for €470 million, a discount of 16 per cent, it took part in the broader European-wide banking rally.

All three financial stocks on the Irish index, though minuscule in value, saw strong gains. ESM-listed AIB jumped by 15 per cent to close at €0.07, Bank of Ireland gained 6.5 per cent to finish at €0.083, while Irish Life and Permanent, who saw the sale of its insurance business collapse last week, closed at €0.033, a jump of 6.5 per cent.

In the US, stocks surged about 3 per cent on hopes that fresh proposals may emerge out of Europe to help solve the region’s debt crisis. The rally was broad-based, with all 10 SP sectors up more than 1 per cent and all but two of the stocks in the SP 500 stocks in positive territory.

The Dow Jones industrial average rocketed 307.88 points, or 2.74 per cent, at 11,539.66.

The Standard & Poo'rs 500 Index was up 36.55 points, or 3.15 per cent, at 1,195.22. The Nasdaq Composite Index soared 87.84 points, or 3.60 per cent, at 2,529.35.

Retail stocks were among the top gainers after US retailers racked up record sales over the Thanksgiving weekend.

The S&P retail index advanced 3.5 per cent while Best Buy added 2.5 per cent to $26.28 and Macys climbed 6 per cent to $31.23.

Materials stocks were also big gainers, advancing on the back of higher commodity prices.

The S&P materials index surged 4.1 per cent, with Freeport-McMoRan Copper &Gold jumping 6.5 per cent to $36, and Alcoa rising 5.5 per cent to $9.45.

However, some analysts think the gains were just a technical rebound as Wall Street came off its worst week in two months.

“An oversold trading opportunity is likely pending this week, given short-term indicators are increasingly oversold, but the longer-term technical background is increasingly at risk,” said Robert Sluymer, analyst at RBC Capital markets in New York.

(Additional Reporting: Reuters)