European Shares Rally as Euro Bank Pressure Eases

Financial stocks led a solid recovery on European share markets Thursday in thin trade and bank-to-bank lending rates fell, as signs grew that the nearly half a trillion euros banks borrowed from the region's central bank will ease funding strains.

U.S. stock index futures also pointed to a higher open on Wall Street with the final reading on third-quarter GDP expected to confirm a 2.0 percent annualized pace of growth.

The European Central Bank, in its first-ever three-year tender, lent 523 banks a record 489 billion euros ($638 billion) at low interest rates on Wednesday, well above the 310 billion euro take-up forecast.

The scale of the funding operation initially exacerbated concerns about the health of the financial system but was increasingly being seen has having eased pressures on the banks, though concerns remain that it offers no fundamental fix for the debt problems facing the euro zone.

"In the longer-term the liquidity provided yesterday is not going to solve the debt crisis, it is not going to help southern European countries with their problems in getting control of their public debt," said Niels Christensen, FX strategist at Nordea.

Key euro zone bank-to-bank lending rates fell in response to the lending operation.

Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending, fell to 1.410 percent from 1.416 percent on the prospect of a flood of new cash entering the financial system. Longer-term rates also fell.

"Overall, we view the large uptake (at the ECB tender) as positive for the European banks. Leaving aside whether it is good policy or not, it removes funding risk, adds to profits, and also adds to retained earnings and capital," Deutsche Bank analysts wrote in a note.

The euro was up just 0.1 percent to $1.3055 after hitting a session high of $1.3120 in early trade. The single currency is holding steady above an 11-month low of $1.2945 hit last week with traders seeing major support around $1.30, the Dec. 14 low.

In the share market the pan-European FTSEurofirst 300 index gained around 1.1 percent, while the broader Stoxx Europe 600 Index, which ended down 0.7 percent on Wednesday, was up 1.5 percent.

"This is a low volume rally, said Manoj Ladwa, a senior trader at ETX Capital.

Global stocks, as measured by MSCI world equity index edged up 0.2 percent but are still on track for a fall of about 12 percent in 2011.

Investors are winding down for year-end and trading volumes are set to dwindle but the threat of mass credit ratings downgrades for the euro zone countries is still hanging over the market.

ITALIAN CONFIDENCE VOTE

In debt markets attention was focused on Italy where a vote of confidence is due in the upper house on Prime Minister Mario Monti's government to seal approval of a 33-billion euro ($43 billion) austerity package.

The package passed in the lower house last week and is expected to succeed just as easily in the upper house. Were Monti to lose the vote, his government would collapse.

Italian 10-year bond yields were about 3 basis points lower at 6.79 percent after the ECB was forced to step back into the secondary market on Wednesday as yields jumped higher in the wake of the ECB's three-year tender.

Equivalent Spanish paper was yielding 5.36 percent, about 5.0 basis points higher.

The cost of insuring Hungary's debt against default jumped sharply after Standard & Poor's cut the country's rating to junk on Wednesday, highlighting another vulnerable point in the European region.

S&P cut Hungary's rating by one notch to BB+ citing unpredictable government policies, following a similar move by Moody's last month.

Euro zone debt markets are expected to come under fresh pressure with some 230 billion euros of bank bonds, up to 300 billion in government bonds, and more than 200 billion euros in collateralised debt all maturing in the first quarter of 2012.

Commodities markets were muted in thinning pre-holiday trade, with London Metal Exchange copper up 0.6 percent at $7,499 a tonne and Brent crude oil little changed at around $107.75 a barrel.