Banks and miners lead relief rally in London following EU debt deal

Investors in London breathed a sigh of relief after EU policymakers agreed on a comprehensive plan to stem the debt crisis and eliminate the immediate risk of an economic meltdown. The resulting relief rally, led by banking and mining stocks, has put the blue chip FTSE 100 index at three month highs this morning.


Appetite for riskier assets got a boost from the anti-crisis plan announced by the EU in the wee hours of this morning following prolonged negotiations that have kept investors on their toes for the past week.

Banks, which have the greatest exposure to the European debt crisis among London’s blue chips, led the ensuing relief rally in London with Barclays (LON:BARC, up 8.4pct at 193.6p) emerging atop the leaderboard in mid morning.

Shares in Lloyds (LON:LLOY, up 6.3pct at 36.4p) and Royal Bank of Scotland (LON:RBS, up 5.2pct at 26.07p), which are both partly owned by the taxpayer, also were in demand in early trading.

The blue chip FTSE 100 index surged 122 points (2.2 percent), hitting three month highs at 5,767 at 10 AM.

The rescue plan hammered out by EU policymakers includes boosting the European Financial Stability Facility (EFSF) to €1 trillion and writing down half of Greece’s debt owned by private bondholders to slash the country's debt burden to 120 percent of its GDP by 2020.

The EU has also called on banks to raise a total €106 billion of additional capital to improve the stability of the European banking system.

UK banks as expected were not included in the recapitalisation plan, sparing them the need to raise more funds.

While most analysts questioned whether the solution will be enough to protect Europe from a financial meltdown, investors seemed to be relieved just by the fact that the EU managed to come to an agreement, substantially reducing short-term risks for the European economy.

In the few days leading up to the summit, doubts mounted that it will live up to expectations after a meeting of European finance ministers was cancelled, while media reports suggested that euro zone members were at odds over how to increase the size of the bailout fund.

“Sometimes the most archaic and cliché of phrases can provide the most clarity - ‘A house built on a weak foundation cannot stand for long'. Until euro zone economies transcend beyond just the union of a single currency and central bank, structural complexities seem likely to hinder the longer term sustainability of Euro-area economic growth and EUR upside as well,” said analyst at forex.com Daniel Hwang.

Analysts at Shore Capital noted that while the recapitalisation is higher than the initially proposed requirement of between €70 and €90 billion, it is still short of the €200 billion requirement estimated by many market commentators.

“This leaves room for sceptics to argue that the latest solution is still not enough and, while it addresses concerns over Greece, it would still not be enough to protect banks in the event of a collapse of Spain or Italy,” Shore said in today’s note.

Nevertheless, the broker expects the solution to be supportive to UK bank share price performance in the short term as it has removed the immediate risk of debt contagion in the euro zone.

However, Shore advised investors to use the relief rally to dump banking stocks, saying that the mid-term outlook for the sector remains gloomy.

Goldman Sachs also struck a cautious note in the sector, saying that the recapitalisation plan alone cannot be effective until the banks’ “risk-free” assets – sovereign bonds – are perceived as such by the markets.

Away from the banking sector, mining stocks including Kazakhmys (LON:KAZ, up 6.1pct at 986p), Xstrata (LON:XTA, up 5.8pct at 1,061p) and Rio Tinto (LON:RIO, up 5.8pct at 3,490p) also did well this morning after the outlook for energy demand in Europe brightened as a result of the debt agreement.

Demand for small caps has also been depressed by economic uncertainty and lack of progress in Europe’s efforts to stem the debt crisis, which discouraged investors from taking risks.

Following the announcement from Brussels, FTSE AIM 100 index rallied 61 points (1.95 percent) to reach 3,243 by 10 AM with oil and gas companies flooding the leaderboard.

Petroceltic International (LON:PCI, up 11pct at 5.6p) and sector peers Cove Energy (LON:COV, up 6pct at 92.5p), Bahamas Petroleum (LON:BPC, up 4.5pct at 7.5p) and Rockhopper Exploration (LON:RKH, up 4.1pct at 214.5p) emerged among the top performers in the sector.

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