European shares closed fractionally higher on Friday after staging a late bounce when European Central Bank sources told Reuters the ECB was considering setting yield band targets. The move will be part of a new bond-buying programme aimed at keeping the ECB's strategy shielded and avoiding speculators trying to cash in, the sources said.
The report lifted the FTSEurofirst 300 index, which closed 0.1 percent higher at 1,090.38 points, having traded as low as 1,083.10 points, or 0.5 percent lower, earlier in the session. The index closed the week with a 1.8 percent loss, snapping its longest winning streak in seven years, which had seen it gain 14.7 percent in an 11-week rally.
"Markets are fairly priced so I think the recent drift down is healthy given that we had such a quick run," Colin Lunnon, a fund manager at Octopus, said. Investors were looking for hints of new quantitative easing by the Federal Reserve when chairman Ben Bernanke takes part in a central bankers' get-together at Jackson Hole on August 31.
The market will have to wait until September 6 to see whether ECB chairman Mario Draghi fulfils his pledge to "do whatever it takes" to save the euro. Some are speculating he may put off any decision until after a German constitutional court rules on the legality of a new euro zone bailout mechanism on September 12. In a sign of the uncertainty over these decisions and their potential to upset markets, the main gauge of European investor's concerns, the Euro STOXX implied volatility index, or VSTOXX, rose 1 percent on Friday.
The VSTOXX gauges option prices on the Euro STOXX 50 index and rises when investors snap up options to protect themselves against future share price swings. Nick Xanders, who heads up European equity strategy for brokerage firm BTIG, said he thought volatility was still too low given the raft of central bank and political risk events slated for early September.
Given the low liquidity at the moment and the potential for spikes in the market in either direction, he believes realised volatility on Germany's DAX could reach as high as 28 to 29, compared with 21.76 at the close on Friday. Implied volatility on the index fell 0.3 percent to 20.90, while the underlying index rose 0.3 percent and was up around 5 percent since Draghi's pledge to save the euro on July 26.
Technical charts showed the Euro STOXX 50 index, which rose 0.2 percent to 2,434.23 points on Friday, had come down from "overbought" territory and may have sufficient momentum to stage a new bounce in the short term. The euro zone blue-chip index's 7-day relative strength index closed at 51.6 on Friday, where 70 or more indicates "overbought" and 30 or less "oversold" conditions, having hit a seven-week peak of 76.6 on Tuesday.
"The daily RSI (relative strength index) is consolidating from its overbought area, but doesn't show any clear reversal signal," said Nicolat Suiffet, an analyst at Paris-based technical analysis firm Trading Central. Trading volume was low at 62 percent of the index's 90-day average as the effects of the holiday season were compounded by the lack of real news flow on central bank action.
Among the few heavily traded stocks in Europe on Friday was mobile telecoms network maker Ericsson, which fell 1 percent in volume 159.9 percent the average after a report that South Korea's Samsung had won its first 4G network contract in Europe. Persistent bid rumours surrounding British clothing and foodstore chain Marks & Spencer pushed its share price up 4.3 percent in volume more than twice the average as a media report added to market hopes that private equity could be getting ready to swoop.