European stocks rose to the highest level since July 2011, extending gains for an 11th week, as investors anticipated policy makers will stimulate the euro-area economy and German growth retreated less than forecast.
Bankia SA, the lender bailed out by the Spanish state, advanced the most in the Stoxx Europe 600 Index as banks jumped. Vestas Wind Systems A/S rose 11 percent as Germany started a review of renewable energy laws. Julius Baer Group Ltd. slid 11 percent after buying Merrill Lynch’s wealth management business outside the U.S. Lonmin Plc (LMI) fell 15 percent on concern about a possible breach of its debt covenants amid falling profit and a violent labor dispute.
The Stoxx 600 rose 1.1 percent to 272.83 this week for its longest streak of gains since 2006. The benchmark gauge has climbed 17 percent since June 4 as euro-area policy makers eased repayment terms for Spanish banks and optimism for new stimulus measures grew as European Central Bank President Mario Draghi pledged to preserve the euro at all costs.
“There’s nowhere else to invest for a return than stocks and after Draghi’s earlier comments, investors are counting on more action from the European Central Bank, said Steen Groendahl,” the Copenhagen-based director and head of Global Research at Nordea Bank AB. “The ECB will have to say they’re willing to buy bonds one way or the other, most likely in the secondary market, which will help push stocks even higher.”
German Chancellor Angela Merkel, speaking in Canada on Aug. 16, backed the ECB’s insistence on conditions for helping to reduce borrowing costs in indebted countries, saying Germany is “in line” with the central bank’s approach to defend the euro.
“On many of these issues we feel we’re on the right track,” Merkel told reporters in Ottawa. Euro-area policy makers “feel committed to do everything we can to maintain the common currency.”
Germany is facing calls from Italy and Spain to pool debt to bring down bond yields, from Greece to back an easing of its austerity timetable and from the ECB for politicians to take the lead in fighting the sovereign-debt crisis. Merkel also faces domestic pressure from her coalition partners to refuse any more aid for Greece.
Draghi said Aug. 2 that the bank may take action to reduce debt yields for nations on Europe’s periphery, while stressing that the ECB must work “within its mandate to maintain price stability.”
Germany’s economic growth slowed less in the second quarter than economists had forecast as exports and household spending helped to fend off the impact of the debt crisis on Europe’s largest economy.
Gross domestic product rose 0.3 percent from the first quarter, the Federal Statistics Office said on Aug. 14. Economists had predicted a 0.2 percent increase.
France avoided a contraction as GDP was unchanged in the quarter, beating the 0.1 percent decline predicted by economists. The euro-area economy as a whole shrank 0.2 percent in the three months to the end of June, matching estimates.
Hedge funds that base investment decisions on economic trends are unwinding bets against European stocks at the fastest pace in three years, speculating policy makers will step up the fight against the debt crisis.
The degree by which macro funds are trailing the Euro Stoxx 50 Index (SX5E) is narrowing at the fastest rate since 2009, a sign that managers are covering short sales by buying shares, according to data compiled by Bloomberg and JPMorgan Chase & Co.
Bulls say professional investors buying back shares that were borrowed and sold short are fueling a rally led Draghi’s pledge to defend the euro. The Euro Stoxx 50 is up more than 12 percent in three weeks, twice the gain of the MSCI All-Country World Index (MXWD), even as the euro-area economy is forecast to slide into recession.
National benchmark indexes rose in all of the 18 western European markets except Ireland. The U.K.’s FTSE 100 (UKX) gained 0.1 percent, while Germany’s DAX Index jumped 1.4 percent. France’s CAC 40 added 1.5 percent.
In China Premier Wen Jiabao said there’s “growing room for monetary policy operation,” state television reported on Aug. 15, after a release from the Ministry of Commerce showed Foreign direct investment in China slid 8.7 percent from a year earlier to $7.58 billion. That was the eighth drop in nine months and the smallest inflow since July 2010.
A gauge of bank shares advanced 4.2 percent for the biggest weekly advance among the 19 industry groups in the Stoxx 600.
Bankia SA (BKIA) jumped 21 percent on speculation that it will shortly get some rescue funds.
Italian lenders paced advancing shares after the country sold 8 billion euros worth of one-year bills on Aug. 13, meeting its target. The Rome-based Treasury sold the bills at 2.767 percent, up from 2.697 percent at the last sale of similar- maturity debt on July 12. Investors bid 1.69 times the amount of bills offered, up from 1.55 times last month.
Banca Monte dei Paschi di Siena SpA, Italy’s third-biggest bank, rallied 21 percent. Chairman Alessandro Profumo, speaking on local Italian TV Canale 3 Toscana on Aug. 16, said that the company’s foundation has to further cut its stake over time.
Vestas Wind Systems, a wind turbine maker, rose 11 percent. German Environment Minister Peter Altmaier said on Aug. 16 that the government will draw up proposals to overhaul a law that regulates subsidies for solar and wind-power generators. Merkel is shifting Germany away from nuclear power in favor of renewable sources following the meltdown in Japan last year.
Julius Baer (BAER), the Swiss wealth manager established in 1890, dropped 11 percent after agreeing to pay about 860 million francs ($880 million) for Bank of America’s Merrill Lynch non- U.S. wealth management business. The company plans to raise 750 million francs through a rights offering to help fund the deal.
The purchase “looks rather expensive especially when taking into account the integration costs, implementation risks and need for an additional capital increase,” said Teresa Nielsen, a Zurich-based analyst at Vontobel Holding AG.
A gauge of mining companies was the worst-performing industry group in the Stoxx 600, declining 1.8 percent. Mining shares fell with base metal prices as non-performing loans in China rose by 18.2 billion yuan ($2.9 billion) to 456.4 billion yuan in the three months ended June 30, according to the country’s Banking Regulatory Commission.
Roberto Castello Branco, director of investor relations at Vale SA, the biggest iron-ore producer, said on Aug. 14 that the Chinese economy’s “golden years” are behind it.
Rio Tinto Group (RIO), the world’s third-largest mining company, slid 5.3 percent, the most in three months, while Vedanta Resources Plc, which mines copper and aluminium in India, retreated 4.6 percent.
Lonmin tumbled 15 percent after South African police killed 34 striking workers at its Marikana platinum-mining complex on Aug. 16, the worst death toll in police action since the end of apartheid in 1994.
“With each day of lost strike action, the company is losing around 2,500 ounces of platinum production and an estimated $3 million,” analysts at Absa Capital, a unit of Barclays Plc’s Absa Group Ltd., wrote in a note. “As the strike continues, we believe there is an increasing possibility of Lonmin breaching its debt covenants, resulting in the company needing to renegotiate covenants or raise capital.”
Of the 273 companies listed on the Stoxx 600 (SXXP) that have reported quarterly profit this earnings season, 134 have exceeded analysts’ projections, while 137 have missed them, according to data compiled by Bloomberg.
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