July 2, 2012 / 10:46 AM / 5 years ago

European shares scale two-month highs, await ECB

* FTSEurofirst up 0.7 percent, highest since early May
    * EU crisis measures support sentiment, all eyes on ECB
    * Weak Chinese data underscores risks in global economy

    By Toni Vorobyova
    LONDON, July 2 (Reuters) - European equities scaled
two-month highs on Monday, with heavily underweight investors
rushing to take part in a rally fuelled by expectations of more
policy action to come after concrete steps from politicians to
combat the euro zone crisis.
    An EU summit at the end of last week unexpectedly yielded
agreement on several bold initiatives, including allowing the
euro zone's ESM bailout fund to inject money directly into
stricken banks. 
    Stimulus - most likely in the form of an interest rate cut -
is now expected from the European Central Bank, which meets on
Thursday and which has long called on politicians to act.
    "Expectations were low going into the summit and the summit
delivered more than the pessimists had expected," said Kevin
Lilley, European equities fund manager at Old Mutual AM.
    "There is enough there to keep the market happy, what we
need now is the continuation of the positive news flow with the
ECB coming up with measures, and that might shake out some of
the bears as well ... They need to do at least a rate cut."
    The FTSEurofirst 300 was up 0.7 percent at 1,028.51
points by 1020 GMT, having earlier set its highest level since
early May at 1,033.83 points and extending Friday's 2.6 percent
rise which was its biggest one-day gain in seven months.
    In light of the EU summit measures, investment house
Jefferies recommended longs on the Euro STOXX 50 index
 alongside the sale of safe-haven German Bunds.
    The euro zone blue chip index added 0.8 percent to 2,283.50,
also hitting two-month highs after a wobbly start to the
session.
    "The trend is clearly towards adding in Europe," said
Patrick Moonen, senior equities strategist at ING Invest
Management.
    "Given where investor positioning was before the summit - it
was extremely cautious and Europe was largely underweight ... we
do expect that the euro zone will start to outperform, most
particularly the U.S. market ... In the next couple of weeks we
could easily have another 5-6 percent."
        
    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 politicians' moves cheered the banks, which have direct
exposure to the region's debt crisis through their sovereign
bond holdings. The sector added 1.4 percent.
    Credit Agricole was the biggest gainer on the
FTSEurofirst 300, up 6.8 percent with the broad sentiment lift
bolstered reports that the French bank is in talks at least one
bank to sell all or part of its struggling Greek unit Emporiki
Bank. Credit Agricole declined to comment.

    RISKS
    Market players, however, stressed that risks remained. A
reminder of the outstanding issues within the euro zone itself
came from news that Finland and the Netherlands plan to block
the euro zone's permanent bailout fund from buying bonds in
secondary markets. 
    Outside the euro zone, the health of the global economy is
the primary concern as European companies which are increasingly
looking abroad for earnings growth as the region's domestic
economy stumbles. There was little cheer to be found in data
showing that factory activity in China's private sector shrank
at its fastest pace in seven months in June. 
    "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," said Baader Bank equity strategist Gerhard Schwarz.

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