Optimism fuels rise in European markets

European stocks and the euro rose today on optimism that policymakers will take major steps at a summit this weekend to tackle the debt crisis, offsetting the market impact of a cut in Spain's sovereign credit rating.

German Bund futures were lower as safe-haven government bonds were sold off on a report in Britain's Guardian newspaper that France and Germany had agreed on a deal to increase the euro zone bailout fund's firepower by five fold.

The reported agreement was later denied by two senior European Union officials.

Nevertheless, the FTSEurofirst 300 index of top European shares was up 1 per cent while world stocks as measured by the MSCI index were up 0.85 per cent.

The Irish index of shares was up half a per cent.

"It's interesting that despite the denial the market still wants to go higher, which implies the market does think there's something in the pipeline," Jeremy Batstone-Carr, strategist at Charles Stanley, said. "We'll see more whipsawing in the market in the run-up to Sunday."

Investors were still cautious about the degree of progress policymakers will make at the summit.

German chancellor Angela Merkel said Sunday's meeting would be an important step, but warned one summit would not be enough to resolve the crisis, while the EU's trade chief said the euro zone could unravel unless tough action was taken.

Moody's, one of the big three ratings agencies, yesterday cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stresses. The latest step followed Moody's warning on Monday over risks for France to maintaining its top credit rating.

Despite the downgrade, the cost of insuring against a Spanish default fell, according to monitor Markit. Italian CDS prices also narrowed 14 basis points to 435 basis points.

The euro recovered earlier losses made on Moody's downgrade of Spain and was last up 0.9 per cent at $1.3860. The dollar index, which measures the US currency against six major currencies , was down 0.68 per cent.

"The euro may have set itself up for a fall," said Jane Foley, senior currency strategist at Rabobank. "There is clear risk that this weekend's crucial leaders' meeting will provide disappointment."

Bund futures extended losses after a German 10-year bond sale met weak demand.

Investors also retreated from another safe-haven asset, gold. Spot gold was bid at $1,653.30 a troy ounce, down from $1,658.64 an ounce late yesterday in New York.

Reuters