European shares edged higher on Tuesday, with Deutsche Bank leading a rally among euro zone lenders after saying it would not ask shareholders for more cash to strengthen its capital base. Shares in Germany's top bank rose 4.1 percent in heavy trading as investors were relieved to hear the management would focus instead on cost cuts and asset sales.
The broader STOXX 600 Euro zone banking index rose 1.9 percent to a six-month high as investors continued to be reassured by a European Central Bank pledge last week to buy the sovereign bonds of struggling countries that ask for a bailout.
---- Germany's Dax hits new 2012 high
"The ECB's bond buying plan is a game changer, because it can remove the systemic risk," said Sandra Crowl, who sits on the investment committee of Carmignac Gestion in Paris. "We had already started exposing the funds to European banks during August because our expectations about what the ECB would do were high." Carmignac, which has assets worth over 50 billion euros under management, took positions in euro zone banks including France's BNP Paribas last month, moderating a deeply underweight position on the sector.
Crowl added there may be opportunities to start taking profit on stocks that have outperformed during the recent bear market, including suppliers of non-essential consumer goods to emerging markets. Among them, the British fashion house Burberry fell 21 percent in heavy trade after issuing a profit warning showing that a slowdown in China combined with Europe's debt crisis was bringing a nearly three-year boom in luxury goods to an end.
Burberry led a 1 percent fall in the STOXX 600 personal and household goods sector, which had risen 16 percent this year. The sector was trading at 14.7 times its expected earnings for the next 12 months, a premium to its 10-year average at a time when most sectors are trading far below the average, Datastream data showed. The broader FTSEurofirst 300 index ended 0.3 percent higher at 1,107.17 after rebounding in the afternoon, mirroring gains on Wall Street.
"We see some American activity today on the European markets after ... the (ECB chairman Mario) Draghi move," a trader in Brussels said. "Everybody agrees in the short term we're a bit out of the woods because there is a floor." Germany's Dax index rose 1.3 percent to a new 2012 high of 7,310.11 while the euro zone blue-chip Euro STOXX 50 index rose 1.2 percent to 2,557.65.
Charts on the Euro STOX 50 pointed to further gains ahead, with the index heading towards its March top at 2,611 after breaking out of a bearish channel at 2,510 last week, according to Ouri Mimran, a technical strategist with Cheuvreux in Paris. He expected the index to break above 2,611 and head towards 2,641, the 61.8 percent retracement of the February-September 2011 slide, and then its July 2011 high at 2,800. "We've seen some buying on the dips late today, which strengthens our positive view for the weeks to come, Mimran said."
While sentiment remained positive, some investors took advantage of relatively low option prices to buy protection against any jitters associated with a German Constitutional Court ruling on the euro zone bailout fund on Wednesday and the chance that the US Federal Reserve may not deliver widely awaited stimulus on Thursday. The main gauge of European equity investors' concerns, the Euro STOXX implied volatility index, or VSTOXX, rose 1.8 percent to 23.92.
The VSTOXX gauges option prices on the Euro STOXX 50 index and rises when investors buy options to protect themselves against future share price swings. Implied volatility on the Euro STOXX 50 has picked up from last week's one-month lows of 21.77, but is still some 6 points lower than it was before the ECB unveiled the details of its bond buying on September 6.
"Despite lower implieds (and large recent spot moves), most (volatility) indices continue to trade rich to realised vol (volatility) - consistent with the list of major catalysts still to come," UBS derivative strategists said in a note. They proposed that investors who expect a jittery fourth quarter use options to bet on a rise in the VSTOXX to between 30 and 40.