European stocks rally

European stocks ended higher on Wednesday, with benchmarks closing at levels not seen since August, after a drop in Italy's borrowing costs at an auction and a brighter forecast from the US Federal Reserve fuelled the market's brisk week-long rally. Sharp losses in Portuguese stocks and an underperforming Madrid bourse, however, showed investor wariness about the two countries' ability to deal with their debt piles, which could yet threaten the European market gains made since mid-December.
The FTSEurofirst 300 index of top European shares ended 0.3 percent higher at 1,098.37 points, while the euro zone's blue chip Euro STOXX 50 index added 0.7 percent, to close at 2,574.79 points. Banks paced the gains, with Natixis up 5.2 percent, Credit Suisse up 5 percent and KBC up 4.6 percent.
"The ECB's two LTROs have had an extremely positive impact on sentiment. The risk of a bank going bankrupt is virtually gone," said Philippe Ithurbide, head of research and strategy at Amundi, which has 659 billion euros ($859 billion) under management. The strategist said fund flow data has shown massive outflows from European equities over the past year, signalling that asset managers are strongly 'underweight' Europe, which limits the downside risk for the region's equities.
Among the top gainers on Wednesday, Germany's biggest utility E.ON surged 7 percent after reiterating its outlook and saying it made headway with the renegotiation of pricey gas contracts that weighed down earnings in 2011. PSA Peugeot Citroen gained 4.2 percent following a recent slump as traders pointed to a 'short squeeze' ahead of the company's rights issue.
But Portugal's PSI 20 index dropped 0.7 percent on Wednesday while Spanish stocks gained a small 0.2 percent, falling behind the DAX's 1.2 percent rise on the day. So far this year, the PSI 20 is up 2.2 percent, Spain's IBEX is down 2 percent, while the FTSEurofirst 300 is up 9.8 percent and the DAX is up 20 percent.
The red-hot German index was showing signs of overheating on Wednesday, with its relative strength index (RSI) moving just a few points shy of 'overbought' territory. The derivatives market also showed signs of doubts about further gains in equities in the short term, with the put/call ratio on Euro STOXX 50 index options currently at around 1.5, a sign of investor cautiousness overall.