European shares hit a one-week high after a low-volume rally extended into a third day on Tuesday, buoyed by positive US consumer confidence data and hopes policymakers will make progress to contain the eurozone debt crisis at a meeting.
The US data showed consumer confidence bounced back from a 2-1/2 year low in November as apprehension about job and income prospects in the world's largest economy eased, prompting investors to actively buy equities in late afternoon session. The FTSEurofirst 300 index of top European shares finished up 0.8 percent at 947.89 points, the highest close since November 18. Volumes were 75 percent of its 90-day daily average. The index is down 15 percent in 2011 on worries the debt crisis could spread to countries such as Italy and Spain. The latest auction of Italian debt on Tuesday brought some relief to investors as it met strong demand, although the country's borrowing costs hit a euro lifetime high of nearly 8 percent, above levels at which Greece, Ireland and Portugal applied for international bailouts.
"The market is benefiting from the Italian auction that saw good bid-to-cover ratios, even if it was at considerably higher levels," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels. "Once again hope is up for some comprehensive solution for the problems of the eurozone."
"But all we have at the moment are rumours and promises. If these do not morph into something more concrete, markets may once again be very disappointed. European leaders have got another chance to get their act together." In Brussels, Eurogroup ministers were expected to approve detailed plans to bolster their bailout fund to help prevent contagion in bond markets. Ministers said the International Monetary Fund may have to provide more help. The European travel and leisure sector featured among the top gainers, with the sector index rising 1.7 percent and TUI Travel advancing 2.5 percent on expectations that financial troubles at its rival Thomas Cook will help TUI. Thomas Cook shares slumped 13 percent.
Across Europe, Britain's FTSE 100 index rose 0.5 percent, Germany's DAX advanced 1 percent and France's CAC-40 gained 0.5 percent. The euro STOXX volatility index fell just 0.8 percent, although investors were expecting a bigger decline after strong gains in the past sessions. A European derivatives trader said this indicated that investors remained nervous and avoided strong bets on the upside.
He said options volumes had fallen between 20 to 30 percent in the past four to six weeks and focus was on contracts having shorter maturities as people were not willing to take much risk ahead of the year end. Ramin Nakisa, global cross-asset strategist at UBS, noted that the volatility index was hovering around 40 and was just refusing to come down.
"Recently it's been crazy, but I don't think we're going to see a massive fall-off in the near future until there's some sort of resolution to the events in Europe. The macro view in Europe is very negative and continually surprising on the downside, which is a good reason for volatility to stay high."
Investors stayed cautious as there were several factors on the fringes that could suddenly blow up. Business daily La Tribune said ratings agency Standard & Poor's would lower its outlook on France's AAA credit rating to negative within 10 days. Such a move would hit the euro zone's ability to rescue heavily indebted countries. French Prime Minister Francois Fillon, however, dismissed the newspaper report as baseless.