Europe stocks extend rally as banks play catch-up

By Blaise Robinson

PARIS (Reuters) – European stocks rose on Wednesday, adding to their three-week rally as investors looked beyond the European Central Bank’s expected rate rise, brushing aside Portugal’s debt woes and piling into recently-hit banks.

The FTSEurofirst 300 index of top European shares ended 0.3 percent higher at 1,147.24 points in strong volume, gaining ground for the 13th time in 15 sessions and closing above its 50-day moving average for the first time since early March, fuelling expectation of more gains.

The volume on the FTSEurofirst 300 represented 135 percent of the index’s 90-day average daily volume, making the session the 9th most active day so far this year.

The benchmark index, which has surged 7.6 percent over the past three weeks, is still down 3.7 percent from a 29-month high reached in mid-February, before violence in Libya and Japan’s nuclear crisis dampened investor appetite for risky assets such as equities.

Banking stocks, which had missed the broad market’s recovery run that started in mid-March, featured among the top gainers on Wednesday, staging a catch-up rally on the eve of the ECB’s interest rate decision and comments.

The central bank is widely anticipated to raise its benchmark rate by 25 basis points on Thursday afternoon, its first hike since July 2008, and follow that with other rate hikes later in the year.

“We’ve had aggressively low rates for a while, and raising them at this point means we’re back to a more normal environment, so that’s good news,” said Marc Renaud, president and fund manager at Paris-based Mandarine Gestion, which has 1.8 billion euros ($2.6 billion) in assets under management.

“There’s been hypersensitivity on the market and especially on banks, but at the end of the day, risks related to sovereign debt have been exaggerated and banking stocks have been excessively hammered,” Renaud said.

BBVA rose 3.2 percent, HSBC added 2 percent and Societe Generale gained 2.8 percent.

Despite the market’s brisk three-week rally, European stocks remained relatively cheap. Europe’s broad STOXX 600 index

carries a forward price-to-earnings (P/E) ratio of 10.6, well below its 10-year average of 13.6, according to Thomson Reuters Datastream.

Europe’s STOXX bank index, which has been dragged by fresh fears of rights issues in the sector, carries a P/E ratio of 8.6, well below a 10 year average of 13.1.

In a sign that risk appetite continued to recover on Wednesday, the Euro STOXX 50 volatility index fell 1.8 percent to a near two-month low.

Investors were relieved to see Portugal placing all of its 1-billion euro T-bill auction despite a threat by local banks to stop buying government debt, and brushed aside concerns over the sharp rise in yields.

Despite the overall positive mood, however, some market players said the banking sector’s tentative rally could be short-lived.

“Many hedge funds have been short, generally, on banks as a sector, and there’s a bit of short-covering gone on today which has caused some slightly more violent moves than really is justified,” a London-based trader said.

“I don’t see a lot of follow through on this bounce at the moment. Our head of trading has been indicating that people will be trying to sell into these bounces,” he said.

(Reporting by Blaise Robinson; Additional reporting by Simon Jessop in London; Editing by Jon Loades-Carter)

Europe stocks extend rally as banks play catch-up