European shares rise

European shares closed higher on Thursday, boosted by euro zone banks as newly available cheap cash from the European Central Bank helped some sovereign bond yields to fall and further allayed default risks among corporates. Euro zone banks rose 2.6 percent after France's and Spain's borrowing costs fell at auctions on Thursday and yields on Italian notes dropped on the secondary market.
Italian banks, which own the lion's share of the country's debt, led gainers with Banco Popolare rising 10.5 percent and UniCredit up 5.8 percent, helping Milan's FTSE MIB index outpace its peers to close 2.9 percent higher. "The funding risk in the banking system has reduced substantially," Dennis Jose, strategist at Barclays Capital, said.
Jose, however, remained cautious on the prospect of a sharp equity re-rating fuelled by ECB money and reiterated his 675 points year-end target for the pan-European Stoxx 600 index, pointing to a mere 3 percent upside to Thursday's close at 267.06. The FTSEurofirst 300 index of pan-European shares ended 1.1 percent higher at 1,086.72 points on Thursday, a level not seen since February 22.
Volume on the index, however, was in line with its lacklustre 90-day average, suggesting investors were still reluctant to go back into equities. Among the most heavily traded stocks was French telecoms and entertainment group Vivendi, which fell 10.1 percent on volume more than six times its average after a steeper-than-expected dividend cut.
"The dividend market was primed at 1.4 euros a share for this year and 1.25 for next year, so the news surprised the market a little bit and that's why the share reaction has been so severe," a head of derivatives trading at a European investment bank said. Volatility on euro zone shares, a measure of equity investor 'fear' gauged by the Euro Stoxx Volatility index, fell 4.5 percent on Thursday but analysts warned spikes were possible in the coming months. The gauge, based on sell- and buy-options on the Euro STOXX 50 index, is down more than 40 percent since the start of December, as a steady flow of ECB cash supported equities and eased investor concerns about future share price declines.