European equities rose on Friday, briefly testing last week's 14-month highs, propelled by gains in banking shares on speculation Spain was moving towards a bailout request, but the uncertain economic outlook could hold back the market. Euro zone banks rose 2.4 percent, driven by Spain's BBVA and Banco Santander, as Madrid was said to be taking steps to meet conditions for an international rescue, which could pave the way for monetary support from the European Central Bank.
The pan-European FTSEurofirst 300 index provisionally closed at 1,119.46 points, up 0.4 percent on the day and broadly flat over the week, which was marked by soft economic data from the euro zone and China curbing optimism over the impact of stimulus action by central banks.
"The Spanish have done all the right things as far as the Germans and the ECB are concerned, (the bailout) is a formality," David Hussey, head of pan-European equities at Manulife Asset Management, said. Manulife, which has 220 billion Canadian dollars ($225.35 billion) under management, increased its exposure to the euro zone over the summer on expectations the European Central Bank would intervene to support struggling countries.
The Euro STOXX 50 volatility index, which gauges option prices on euro zone bluechips and is regarded as a measure of investor fears of future share price swings, fell 4.4 percent to a 6-month low on Friday. "Volatility has been coming off quite substantially because effectively tail risk has been lopped off by central bankers," Abhinandan Deb, European head of equity derivative strategy at Bank of America Merrill Lynch.
"With the central banks' support people are more confident to put money to work, but that does take time. There is still some scepticism about the growth angle and only when there are signs of sustained growth will people believe in the equity story." Euro zone manufacturing data published on Thursday disappointed and Italy warned that its recession will be far more severe than forecast, making it harder to reduce the country's debt burden.
The Euro STOXX 50 rose 0.9 percent to 2,577.08 points on Friday but ended the week 0.7 percent lower as renewed macroeconomic concerns gave some investors an excuse to book profits from a 20 percent rally since late July, fuelled by a 50 percent jump in the banking sector.
"If the Spanish bailout goes well, the rally in euro zone banks can continue and have a second leg," said John Velis, Russell Investments head of capital markets research for Europe, the Middle East and Africa. Russell, which has approximately $152 billion in assets under management, recently reduced its "overweight" positions in US equities and global corporate credit to lock in gains accrued during the summer rally. It now has a "neutral" positions across regions and asset classes.
Charts on the Euro STOXX 50's December futures showed the index may continue to move sideways after failing to break above a major resistance last Friday, corresponding to highs hit last March. The contract, which rose 0.9 percent to 2,562 points on Friday could retrace its way to its September 7 low of 2,496 in the very short-term, according to chartist Philippe Delabarre at Trading Central in Paris.
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