European shares closed at a near seven-month high on Monday as euro zone finance ministers edged closer to a long-awaited agreement on a rescue package for Greece.
The pan-European FTSEurofirst 300 index of top shares rose 0.7 per cent to 1,090.95 points. Volume was low, at 69.5 per cent of the 90-day average, with Wall Street closed for a holiday.
“We have had quite a good run year-to-date, and a lot of it is premised on Greece getting its bailout. There may be another day of euphoria but then we will get back to normal and could sell off a bit,” said Michael McNaught-Davis, head of international equities at Scottish Widows, which has £145-billion ($229-billion) under management.
Euro zone finance ministers inched towards approving a second bailout for debt-laden Greece that will resolve the Greek government’s immediate repayment needs.
Stocks rose almost across the board. Banks, many of which have significant exposure to Greece and other peripheral euro zone countries and have taken a hit on their balance sheets, were among the biggest gainers.
Euro zone banking stocks rose 2 per cent, and are now up 18 per cent in 2012. As well as more confidence that the euro zone debt crisis is being contained, the sector has gained from the European Central Bank’s long-term refinancing operation, providing cheap funding.
“While there remains broad scepticism that this bailout will effectively draw a line under the long running Greek debt saga, it would appear that markets believe that for now, an imminent messy default scenario could well be averted,” said Michael Hewson, senior market analyst at CMC Markets.
Mining stocks gained after top metals user China cut the amount banks must hold in reserve, which should allow more lending to boost its economy. China’s central bank effectively made available an estimated $55.6-billion to $63.5-billion additional cash for lending, which could boost demand for metals.
The STOXX Europe 600 Basic Resources Index rose 1.6 per cent, taking its gain in 2012 to 16 per cent.
Mr. McNaught-Davis said he was sticking with more defensive, sectors such as healthcare, consumer discretionary and consumer staples, adding he had “warmed up a bit towards cyclicals” and was less underweight on industrials than he had been, including buying German carmaker BMW.
Signs of economic recovery, notably in the United States, have helped boost risk appetite, and defensive sectors have underperformed, with the healthcare index up just 0.4 per cent in 2012.
The FTSEurofirst 300 pan-European index is up 8.9 percent in 2012, leaving it ripe for a pullback.
The 14-day relative strength index for the benchmark rose to 76.2, on the exponential indicator, with values of 70 and above considered overbought by technical analysts.
“The markets are looking short-term overbought, and I expect some consolidation could occur. In the near term I expect very choppy trade,” said Bob Parker, senior adviser at Credit Suisse.