MARKET COMMENT : Europe Stocks Post Summit-Inspired Rally
06/29/2012| 12:59pm US/Eastern
By Sara Sjolin
European stocks staged their biggest one-day rally of 2012 and Spanish bond yields dropped sharply on Friday, after European leaders unexpectedly agreed on a range of measures to combat the euro zone's debt and banking crisis.
The pan-European Stoxx 600 index jumped 2.7% to 251.17, rallying the most since last fall. For the week, the index closed up 1.9%, while it lost 4.6% on the quarter.
Banks and oil firms led the charge north, with French oil group Total SA adding 4.3% and Italian bank UniCredit SpA up 14.3%.
"Stocks have been hammered lately and it's very natural to go up like this when you get some good news," said Peter Garnry, an equity strategist at Saxo Bank.
"This shows that policy makers are willing to move to get a step closer to integration," he said. "There were some concerns if the Germans would be willing to soften their stance on the growth compact and the requirements for peripheral Europe and now it looks like Germany is willing to move."
The European benchmark index had closed in negative territory in five out of the past six trading days on concerns European leaders would fail to produce a breakthrough to contain the currency bloc's debt and banking problems at a two-day summit in Brussels, which started Thursday.
The leaders, however, defied market skepticism by agreeing to allow Europe's rescue funds to directly recapitalize the banking sector once a single financial supervisor for the euro zone is in place.
The move will allow Spain's government to avoid taking the cost of its requested bank bailout onto its own books. They also agreed on a widely anticipated 120 billion euro ($149 billion) spending package for the euro zone.
The leaders further indicated that the rescue funds can be used to buy government debt, aiming to bring down borrowing costs in Spain and Italy.
Bank stocks rallied, with the Spanish and Italian banking sector rising sharply.
In Spain, BBVA SA surged 9%, Bankinter SA jumped 7.3%, while Banco Santander SA added 6.9%.
The IBEX 35 index rallied 5.7% to 7,102.20, putting in its best daily performance since May 2010. The index closed 3.3% higher for the week, but came out of the quarter with an 11.3% loss.
Pressure further eased on the country's borrowing costs, with yields on 10-year government bonds dropping 60 basis points to 6.30%, according to electronic trading platform Tradeweb. A basis point is 1/100 of a percentage.
Italian yields were also on the decline, with those on 10-year government bonds down 39 basis points to 5.81%.
Among Italian stocks, Banca Popolare dell'Emilia Romagna Scarl jumped 10.5%, helping lift the FTSE MIB index 6.6% to 14,274.37. On the week, the index jumped 4.5%.
"What makes the European banking system fragile are some big peripheral banks that are too big to be bailed out by their own sovereign government. What we need is a cross-border backstop to bail out banks and the [recapitalization plan] can do that," said Saxo Bank's Mr. Garnry.
But he cautioned: "Let's see how long these gains can last. I mean structurally nothing has really changed and it always takes time for these measures to get implemented."
The euro rallied to $1.2678 compared with $1.2429 in North American trade late Thursday.
In the U.S. stocks were boosted by the newfound optimism in Europe and opened sharply higher on Wall Street.
Elsewhere, oil firms were on the rise as oil prices jumped above $81 a barrel. In the U.K., BP PLC gained 2.3% and BG Group PLC rose 3.1%. The FTSE 100 index closed 1.4% higher at 5,571.15 and rose 1% on the week, although down 3.4% on the quarter.
In France, the CAC 40 index gained 4.8% to 3,196.65, buoyed by Societe Generale SA, which soared 10%, and BNP Paribas SA, up 9.7%.
Germany's DAX 30 index advanced 4.3% to 6,416.28, with Deutsche Bank AG rising 5.9%.
Car maker BMW AG picked up 5.1% after UBS lifted the stock to buy from neutral. Daimler AG tracked higher, up 4.5%.
Among other notable gainers, beer company Anheuser-Busch InBev N.V. added 3.9% after it confirmed it will buy the remaining stake in Grupo Modelo that it doesn't already own in a deal valued at $20.1 billion.
Write to Sara Sjolin at AskNewswires@dowjones.com