European stocks hit five-week high

European stocks rose to a five-week closing high on Monday, after French president Nicolas Sarkozy and German chancellor Angela Merkel agreed on a range of measures to help resolve the eurozone debt crisis. Banks rose sharply, with the STOXX Europe 600 Banking Index up 2.5 percent, though it is down nearly 30 percent in 2011 with many banks having suffered heavy writedowns on exposure to eurozone sovereign debt.
France's BNP Paribas rose 4.9 percent and is up 33 percent from a low of two weeks ago. The FTSEurofirst 300 index of top European shares rose 0.8 percent to 993.27 points, the highest close since October 31 and following last week's 8.5 percent jump, on growing optimism that action will be taken to stem the crisis.
"There's some reassurance in the statement. They're talking about treaty change by March. They're moving in the right direction. And we've seen some short covering," said Ian King head of international equities at Legal & General, which has 356 billion pounds ($559 billion) under management.
The leaders of France and Germany agreed a master plan for imposing budget discipline across the eurozone, saying the EU treaty will need to be changed in the search for a sweeping solution to its debt crisis. Sarkozy said the Franco-German agreement was "very complete" and will be written up in a letter and presented to European Council President Herman Van Rompuy on Wednesday, ahead of a key EU summit on Friday.
Other developments in eurozone countries helped to buoy sentiment. Italy's FTSE MIB gained 2.9 percent after the Italian government unveiled a fresh package of 30 billion euros of austerity measures. This eased tensions surrounding the country's finances, with Italian 10-year bond yields dropping towards 6 percent.
Financial services group KBC soared 12.9 percent as Belgium's one-and-a-half year search for a new government drew to a close, sharply drawing down yields on Belgian government bonds. Belgium's benchmark BEL20 rose 1.9 percent. But strategists warned that the recent rally for equities may soon peter out.
"Markets have had a good bounce, so there's scope for disappointment," said King, adding that cyclical sectors such as construction, materials, autos and chemicals would be especially vulnerable, given the view that the region was headed for a recession. Despite Monday's gains on the market, The Euro STOXX 50 volatility index - Europe's yardstick of investor sentiment known as the VSTOXX - rose 0.8 percent, signalling investors' hesitation about piling into risky assets before Friday's summit.
Technical analysts remained upbeat. The pan-European index's advance has lifted through its 50-day moving average "in a decisive manner and although its 200-day average is still a long way off, the chart shows that it is knocking on the door of critical resistance in the form of its medium-term downtrend, at 1000 or so" said Bill McNamara, technical analyst at Charles Stanley. "The index looks mildly overbought at this point but further gains still look possible."
Looking forward, J.P. Morgan strategists see opportunities in derated cyclical stocks and geographically prefer exposure to core Europe, in particular Germany's DAX, over peripheral countries while the near-term outlook remains challenging. "We believe selected cyclicals have been penalised too much, especially the emerging market sensitive ones. We find value in 'low ROE' (return on equity) and 'Value' styles," they wrote in a note.
HSBC also highlighted opportunities in cyclical stocks and added: "Valuations in global markets are cheap by historical standards. While this might not help much in the short run if the most disastrous scenario plays out, it should mean that for long-term investors, equities offer a reasonable return, and almost certainly more than the expected negligible returns from cash."