European stocks rallied on Friday, with a key index hitting a level not seen since before the market's early August nosedive, fuelled by renewed expectations of a bailout deal for Greece that would further ease tensions over the euro zone debt crisis.
The FTSEurofirst 300 index of top European shares closed 0.6 percent higher at 1,083.22 points, led by shares of euro zone lenders among the most exposed to the Greek crisis such as Societe Generale and Credit Agricole, up 6.5 and 4.7 percent respectively.
The index has gained 1.8 percent on the week, posting a fifth weekly gain for the year. Debt-troubled Greece seemed to be edging closer to an agreement for a new rescue package that would allow the country to begin a debt swap with private bondholders and avoid a messy default, though nothing was announced on Friday.
"No Greek news is good news," said Peter Garnry, equity strategist at Saxo Bank in Copenhagen. "Investors seem to be positioning for a deal on Greece which would lift uncertainty in the short term." Expectations that an agreement could be struck before a meeting of euro zone finance ministers on Monday fuelled a rally in stocks of euro zone peripheral countries, with Greece's ATG index surging 5 percent, Spain's IBEX up 1.2 percent and Italy's FTSE MIB adding 1.1 percent.
The euro zone's blue chip Euro STOXX 50 index ended 1.2 percent higher at 2,520.31 points, moving back into its two-month ascending channel after breaking below the lower band of the channel during Thursday. "A deal seems to be imminent, although it would really just kick the can further down the road for Greece," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion, in Paris.
"When the deal is finally reached, investors will turn their focus on the ECB's next 'LTRO' operation, which could fuel the stock rally and push the Euro STOXX 50 to above 2,600 points, and even to 2,700." This year, the FTSEurofirst 300 has gained 8.2 percent, Germany's DAX 16 percent, Italy's FTSE MIB 9.7 percent and Spain's IBEX 1.1 percent.
"Italian equities were excessively hammered last year, while Spanish stocks have outperformed, but the risk is clearly more on Spain than Italy," Jimenez said. Around Europe, UK's FTSE 100 index gained 0.3 percent on Friday, Germany's DAX rose 1.4 percent, and France's CAC 40 added 1.4 percent.