European shares lifted by China policy move, Greece

LONDON: European shares were up on Monday afternoon after China cut the amount banks must hold in reserve, which should allow more lending to boost its economy, and on expectations Greece will get its second bailout.

By 1238 GMT, the pan-European FTSEurofirst 300 index of top shares was up 0.7 percent at 1,090.39 points, hitting a near seven-month high. It is up 8.8 percent so far this year.

Mining stocks, which are highly correlated to better economic growth, particularly in resource-hungry China, were the top movers, rising 2.1 percent after China's central bank effectively made available an estimated $55.6-$63.5 billion in additional cash for lending.

Eurasian Natural Resources and Vedanta Resources, which have exposure in Asia, were the standout gainers, rising 3.3 percent and 3.2 percent.

Sentiment also improved on the expectation that Greece would get approval from euro zone finance ministers for the 130 billion euro ($171 billion) bailout it needs to avoid a messy default on its heavy debt load, though the size of losses private bondholders will be asked to take was still under discussion.

Banking stocks were up 1.4 percent, with French banks Credit Agricole and BNP Paribas, which are heavily exposed to euro zone sovereign debt, rising 2.6 percent and 1.5 percent.

"Money has been flowing into the markets, the Greek deal has been progressing, and another positive is China, but I only expect upside to be limited to 2 percent, even if Greece gets the bailout," said Bob Parker, senior adviser at Credit Suisse.

"The markets are looking short-term overbought, and I expect some consolidation could occur. In the near term I expect very choppy trade."

The Relative Strength Index for the FTSEurofirst 300 hit 70.5. A score of 70 and above is considered overbought by technical analysts.

There was also the risk of a sharp drop in equities if the Greece deal did not go ahead, with the main concerns being the country having to leave the euro zone as well as contagion to other countries such as debt laden Portugal.

"If this doesn't happen, you will get a major shock and might see a correction of as much as 10 percent. At the end of the day, it will be growth that will decide whether Greece is going to be saved or not," said Koen De Leus, strategist at KBC Securities.

"If you want to buy equities now, buy defensives such as telecoms and healthcare. Focus on companies with high dividend yields. If cyclicals fall about 10 percent from here, than that could be a good entry point."

Copyright Reuters, 2012