Asian shares and the euro surged on Friday after European leaders agreed that euro zone banks could be recapitalized without adding to government debt and opened the way for tapping a rescue fund, soothing fears over growing credit strains in Italy and Spain.
European Council Chairman Herman Van Rompuy said the aim was to create a single supervisory mechanism to break the “vicious circle” between banks and sovereign government debt.
He also said countries complying with EU budget policies would be able to access the bloc’s temporary EFSF and permanent ESM rescue funds to support their government bonds on financial markets.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS jumped 2 percent and the euro spiked against the dollar to $1.2605 from around $1.2450 before his comments. The euro was last up 1.2 percent at $1.2594.
U.S. stock futures also rose and were up 1.3 percent by midday.
“Markets are reacting positively to the headlines, seeing that measures to help Italy and Spain will be stronger,” said Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole CIB.
“But expectations were very low and it may only be temporary,” he warned.
Italy and Spain, threatened by markets pressuring to lift their borrowing costs to unsustainable levels, had blocked a 120 billion euro ($149 billion) growth package at the two-day EU summit on Thursday to demand urgent action to calm their credit woes.
Japan’s Nikkei average .N225 jumped 1.5 percent as afternoon trading resumed, reversing earlier losses. .T
“Because market expectations on the summit were so depressed, it was a bit like there was a drop of rain in desert,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
“But it’s not clear exactly what was agreed so we still need to see the debate in the second day of the summit.”
Worries that EU divisions would not be resolved pushed Spanish 10-year yields above 7 percent, a level widely seen as unsustainable, on Thursday. Investors were relieved Italy sold five and 10 year bonds at the top of its issuance range and the market absorbed the supply without a hitch, but its borrowing costs on both issues rose to their highest since December.
As the euro advanced, the dollar retreated against a basket of currencies .DXY, falling 1 percent.
Oil futures added more than $1, with U.S. crude rising 2.1 percent to $79.35 a barrel and Brent up 1.4 percent at $92.64 a barrel. <O/R>
London copper rose 1.4 percent at $7,490 a tonne, helped by a weaker dollar and assurances by Beijing that top metals consumer China will meet it GDP growth target for the year.