More gains for EU stocks as optimism rises on Greek PSI deal

EU stocks continued to recover from Tuesday’s sharp losses on rising optimism that Greece will be able to secure a high participation rate in its bond swap with private debt holders, whilst yesterday’s strong US ADP employment report has also helped to boost expectations that tomorrows all important US non-farm payrolls may please the market.

The FTSE 100 rallied 1.1% to close at 5859 in trading as investors bought into heavyweight mining and banking stocks, whilst similarly strong gains were seen in German and French stock markets, with the DAX and CAC both closing 2.5% higher.

We have seen European indices firmly bounce back from Tuesday’s aggressive selling and this breeds confidence that investors continue to use any stock market weaknesses as buying opportunities.

Investor optimism that Greece will get the high participation rate of the PSI it requires in its bond swap, to help cut its privately held debt burden, has increased over the past 48 hours, with major banks and pension funds recently announcing their intentions to subscribe to the swap.

Market speculation exists that there participation rate is likely to be higher than the 75% target set by Greece. It was this increase in optimism that helped to entice investors to buy into stocks with a higher appetite for risk, though we must wait until tomorrow morning before European markets open for Greece to release the full participation rate.

The Bank of England and European Central Bank both mainatined their respective interest rates on hold as expected at 0.5% and 1%, whilst the BoE also refrained from adding more asset purchases to QE2, also as expected.

The proceeding press conference to the the ECB decision with President Draghi did however affirm that the ECB’s supportive appetite was starting to slow and highlighted inflationary pressures. Draghi signalled that there were signs of a recovery in the eurozone, having previously used the word ‘tentative’ when discussing any recovery signs, and thereby perhaps indicating that the ECB’s recent LTRO is likely to be it’s last. This perspective was emphasised by Draghi also affirming that the ball was now in the court of EU governments and respective banks.

Eyes are also starting to turn towards tomorrows US jobs report, which will give the market another chance to gauge the seeming recovery of the UK labour market after consecutive monthly declines in the unemployment rate and better than expected payroll figures. Yesterdays US ADP employment change report came in slightly better than expected, and this has boosted some optimism that Friday’s jobs report may also come in strong, with current expectations for a rise of 210,000 non-farm payrolls.

Despite this, weekly jobless claims in the US surprisingly jumped higher to 362k from an upwardly revised 354k, when a fall to 351k was largely predicted by most investors.