European stocks edged higher yesterday, building on a rally in the previous session, as investors hoped an agreement would finally be reached in Washington on the US debt ceiling which would avoid a chaotic default.
At the close, the FTSEurofirst 300 index of top European shares was up 0.5 per cent at 1,250.85 points, after surging 1.7 per cent on Thursday.
The eurozone’s blue-chip Euro STOXX 50 index was 0.2 per cent higher at 2,974.28 points – new two-and-a-half year closing high.
Stocks around the world had lost ground in the past three weeks after an impasse in US budget talks led to a partial government shutdown and sparked concerns about the extension of Washington’s borrowing authority beyond an October 17 deadline.
On Thursday, President Barack Obama and Republican leaders appeared ready to end the deadlock. After having dropped seven of the previous nine sessions, the FTSEurofirst has rebounded, adding two per cent over the last two sessions.
“Over the last few days we’ve seen something of a turnaround on optimism that the debt ceiling will get raised, and at least there’ll be a temporary measure if not a permanent measure. The confidence seems to be returning to the market,” Manoj Ladwa, head of trading at TJM Partners, said.
The Euro STOXX 50 Volatility index, known as the VSTOXX, was down eight per cent, indicating a drop in investors’ risk aversion. Europe’s gauge of investor sentiment, which is based on put and call options on Euro STOXX 50 stocks, has fallen 21.7 per cent since a peak hit on Wednesday.
“Even though investors get nervous when political tensions rise, the backdrop for equities remains quite positive: very accommodative central banks, improvement on the macro front, and relatively good corporate fundamentals,” said Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management, which has $98 billion under management.
“It’s sort of a ‘sweet spot’ for stocks. Now, with the earnings season set to start, we need to see an improvement in the earnings momentum. It has improved lately in Europe, although it remains negative for now.”
Europe’s earnings momentum – analyst forecast upgrades minus downgrades as a percentage of total – has recently improved, from minus 3.2 per cent in July to minus 2.1 per cent currently, data from Thomson Reuters Datastream shows.
Many of the top gainers were spurred by upgrades. Philips gained 3.1 per cent after being raised to “buy” from “neutral”, while Costa-owner Whitbread and hotel operator Accor rose 3.1 per cent and 1.9 per cent respectively after receiving upgrades from Citi.