European Stocks Post Largest Weekly Gain in Three Months

European stocks posted the largest weekly advance since June as European Central Bank President Mario Draghi outlined an unlimited bond-buying program to regain control of interest rates and stem the sovereign debt crisis.

Italian banks led a gauge of European lenders to the best performance on the Stoxx Europe 600 Index, with Banca Monte dei Paschi di Siena SpA and UniCredit SpA (UCG) rallying at least 16 percent. Ashtead Group Plc (AHT), a U.K. construction-equipment rental company, rose to a record after saying full-year earnings will be higher than forecast. Rhoen-Klinikum AG (RHK) sank 23 percent.

The benchmark Stoxx 600 increased 2.3 percent to 272.30 this past week. The gauge has climbed 16 percent from this year’s low on June 4 amid speculation central banks around the world will take further measures to support an economic recovery.

The ECB deal “was a great victory for the periphery,” said Jean-Paul Jeckelmann, chief investment officer at Banque Bonhote & Cie. in Neuchatel, Switzerland. “It confirmed that Spain and Italy are too big to fail and that we will find all the resources to keep them alive. We have solved the liquidity side of the problem but if the economy continues to worsen, the discussion about solvency will rapidly come back. So it’s very good news in the short-term, but still holds some risk for the medium-term.”

National benchmark indexes increased in all of the 18 western European markets this week. The U.K.’s FTSE 100 rose 1.5 percent, France’s CAC 40 added 3.1 percent and Germany’s DAX Index climbed 3.5 percent. Italy’s FTSE MIB rallied 6.7 percent, while Spain’s IBEX 35 jumped 6.2 percent.

‘Effective Backstop’

The ECB will target government bonds with maturities of one to three years, including longer-dated debt that has a residual maturity of that length, Draghi said. Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, and the ECB will not have seniority, he said.

The program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt on Sept. 6. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability.”

The ECB left its benchmark interest rate at a record low of 0.75 percent this week, as predicted by 28 of 58 economists in a Bloomberg survey. The remainder had forecast a quarter-point cut. The Bank of England kept its rate at 0.5 percent and held its bond-purchase target at 375 billion pounds ($597 billion).

Manufacturing Contraction

In the euro-area, a report on Sept. 3 showed manufacturing contracted more than initially estimated in August, suggesting the economy may struggle to avoid a recession in the third quarter.

A gauge of manufacturing in the 17-nation euro area based on a survey of purchasing managers was revised lower to 45.1 from the reading of 45.3 estimated earlier, London-based Markit Economics said. The index, which stood at 44 in July, has held for 13 months below 50, indicating contraction.

A Labor Department report in Washington this week showed that payrolls rose less than projected in August and the unemployment rate declined as more Americans left the labor force, indicating the U.S. labor market is stagnating.

The economy added 96,000 workers last month following a revised 141,000 rise in July that was smaller than initially estimated, Labor Department figures showed in Washington. The median estimate of 92 economists surveyed by Bloomberg called for a gain of 130,000. Unemployment unexpectedly fell to 8.1 percent, and hourly earnings were unchanged.

Italian Banks

Italian banks led European lenders higher to post the best performance on the Stoxx 600 (SXXP) this week, with Monte Paschi (BMPS) and UniCredit rallying 18 percent and 16 percent, respectively. Unione di Banche Italiane SCPA (UBI) jumped 18 percent.

Credit Agricole SA (ACA) climbed 15 percent, while Societe Generale SA (GLE) gained 16 percent.

Ashtead Group rose 17 percent after saying full-year earnings will be “materially better” than previously forecast.

“We are past the worst and into a gentle recovery” in the U.S., Chief Executive Officer Geoff Drabble said Sept. 4 in an interview. Ashtead is seeing a “sense of recovery” in U.S. residential construction, though there is still concern about the government spending, Drabble said. Rentals supporting oilfield development in Texas helped drive earnings to “the highest margins we have ever had at this stage of the cycle.”

Davide Campari Milano SpA (CPR) rose 8.8 percent after the Italian distiller said it will purchase Lascelles deMercado & Co., the Jamaican maker of Appleton rum, in a deal that’s worth $414.8 million to hasten the company’s push into overseas markets.

Miners Advance

Mining companies climbed, pushing a gauge of basic resources companies up 6.1 percent, as Goldman Sachs Group Inc. said this week that Chinese commodity demand is set to rebound into the final quarter as the world’s largest user of energy and metals will see more infrastructure projects and construction.

BHP Billiton Ltd. (BLT), the world’s largest mining group, rose 3.8 percent, while Rio Tinto Group (RIO), the third-biggest, added 10 percent.

Lonmin Plc (LMI) advanced 4 percent after the platinum producer, whose main mine has been shut since Aug. 10 because of a violent strike that led to the death of 44 people, agreed with three labor unions to reopen wage talks.

Under the agreement, the miners will return to work at the operation, which accounts for a 10th of global platinum output, by 7 a.m. local time on Sept. 10.

Rhoen-Klinikum, Nokia

Rhoen-Klinikum sank 23 percent as the German hospital operator said Fresenius SE decided against reviving its takeover bid, capping more than four months of jockeying over the top spot in the German hospital market.

Nokia Oyj (NOK1V) tumbled 9 percent after the introduction of two Lumia smartphones with Microsoft Corp.’s new Windows Phone software failed to impress investors.

Nokia is counting on its partnership with Microsoft to help boost sales and return it to profitability after falling behind rivals. The company has identified the U.S. as a market where it has to win back users and gain momentum in its comeback bid.

British American Tobacco Plc (BATS), Europe’s largest cigarette maker, retreated 3.9 percent and Imperial Tobacco Group Plc (IMT), the second-biggest, slumped 7.9 percent. Russia’s government will submit a law banning smoking in public places to parliament by Nov. 1 and Le Parisien said French Health Minister Marisol Touraine will announce a plan in the coming weeks to remove branding labels from cigarette packs and increase the price by 40 cents per packet from Oct. 1.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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