July 2, 2012 / 8:41 AM / 5 years ago

European shares at 2-month highs, risks remain

* FTSEurofirst index up 1.1 percent
    * EU crisis measures support sentiment, all eyes on ECB
    * Risks remains, as shown by weak Chinese data

    By Toni Vorobyova
    LONDON, July 2 (Reuters) - European equities scaled
two-month highs on Monday, drawing support from policy measures
to battle the euro zone crisis and expectations of more to come,
but weak Chinese data kept a lid on gains.
    Factory activity in China's private sector shrank at its
fastest pace in seven months in June, data showed on Monday,
dampening prospects for European companies which are
increasingly looking abroad for earnings growth as the region's
domestic economy stumbles. 
    The silver lining for equities is that weak data could
galvanise policymakers into action to stimulate the economy. The
European Central Bank widely seen cutting interest rates at this
week's meeting.
    With European leaders unexpectedly agreeing on bold
initiatives at the end of last week, including allowing the euro
zone's ESM bailout fund to inject money directly into stricken
banks, that could provide enough of a boost to turn some
investors more upbeat on the region's unloved stock markets.
 
    "I would not say it's a real game changer but it gives the
market some breathing space over the next couple of weeks,"
Gerhard Schwarz, equity strategist at Baader Bank, adding that
bearish positioning left the market open to further gains,
though with caveats.  
    "The data out of Asia certainly is still showing that, in
particular in China, sentiment is deteriorating ...It is an
environment where only the flexible investors are able to make
money, so a lot of long only investors will be sitting on the
sidelines."
    The FTSEurofirst 300 was up 1.1 percent at 1,032.22
points by 0829 GMT. The pan-European index surged 2.6 percent on
Friday in its biggest daily gain in seven months on the back of
the policy moves agreed at the European summit.
    The Euro STOXX 50 index added 1.5 percent,
touching its highest levels since early May and reversing an
earlier retreat after finding strong technical support around
the 38.2 percent Fibonacci retracement of its mid-March to
late-May downward move.
    
    'BABY STEPS'
    In light of the summit measures, investment house Jefferies
recommended longs on the index alongside the sale of safe-haven
German Bunds.
    "While the final EU communique was short on details and
implementation, the equity markets ought to feel reasonably
assured that the vicious cycle between sovereign credit rating
downgrades and bank solvency has finally been broken,"
Jefferies' strategists said in a note.
    "It only leaves ECB President Mario Draghi to cut interest
rates on 5th July for European equity investors to believe that
they have been underwritten."     
        
    The sentiment ratio as calculated by Paris research firm
2Bremans showed a slim majority of 52 percent of investors have
a positive stance on the market.
    "The fundamental backdrop for financial assets is poor, but
in the short term policymakers are attempting to prop up markets
via central bank action and baby steps on the road to solving
the European crisis," Stewart Richardson, Chief Investment
Officer at RMG Wealth, said in a note.
    The 'baby steps' cheered the banks, which have direct
exposure to the region's debt crisis through their sovereign
bond holdings. The sector added 0.5 percent.
    Credit Agricole was the biggest gainer on the
FTSEurofirst 300, up 3.9 percent with the broad sentiment lift
bolstered by a Financial Times report that the French bank is in
talks to sell its Greek affiliate Emporiki Bank and has received
interest from three local lenders. 
    Credit Agricole declined to comment.

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