Global Markets Rally on EU News

Reuters

The euro surged over 1 percent and shares in Europe and Asia jumped on Friday after euro zone leaders agreed measures to cut borrowing costs in Spain and Italy and eventually recapitalise the region's banks.

With expectations low ahead of the leaders' summit, the deal caught markets by surprise.

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Ten-year Spanish and Italian bond yields fell 25-32 basis points to 6.59 and 5.94 percent, respectively, and the common currency rose more than 1.2 percent on a flurry of stop-loss buying to as high as $1.2628, well clear of a low of $1.2407 on Thursday.

It later settled around $1.2600, with resistance at the June highs of $1.2748.

Safe-haven German bonds and the dollar headed lower, while prices for gold, oil and copper all rose.

After all-night talks, the leaders of the 17-nation currency bloc agreed that euro-area rescue funds could be used for sovereign debt purchases without forcing countries to adopt extra austerity measures.

They also agreed that, once a single supervisory body for euro zone banks has been created, the funds could be lent directly to banks for recapitalisation without penalising existing debt holders.

"It is one step on a very long road," said Charles Diebel, head of market strategy at Lloyds Bank.

"But we don't have any details, and arguably the detail is where the risk lies, because the market will start to pick holes in it as we've seen previously."

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ in London said among questions the market will ask is whether the firepower available to the rescue funds will be enough to stabilise the 2.5 trillion euro Spanish and Italian bond markets, and how easy will it be to agree on the banking supervisory mechanism.

"Our initial view is this deal is no game-changer, and any EUR/USD rally will simply offer attractive levels to sell," he said.

"Definitely some good news for risk markets here, though it is not the 'big bazooka'," agreed Sean Callow, senior currency strategist at Westpac in Sydney, referring to a lack of a reference to the issuance of common euro bonds.

The FTSE Eurofirst 300 index of top European shares rose 1.6 percent, with banks up 2.7 percent, helping send MSCI's world equity index to gains of 1.1 percent.

"Although this had caught the markets a little off guard, the spike higher was a relatively minor move when you account for the market being considerably short at the time of release," Andrew Taylor, market strategist at GFT Global, said in a note.

Oil rose by more than $2, gold jumped over 1 percent and copper gained the most since mid-April on the last trading day of June, though the quarter is still bound to be the worst in years for oil and gold.

Brent crude for August delivery touched a high of $93.57 and was up $1.81 at $93.17 a barrel by 0718 GMT. U.S. crude climbed over $2 to $79.73, pulling away from an eight-month low hit in the previous session.

Spot gold rose more than 1 percent to a session high of $1,571.89 an ounce.