FTSE hits a five-week high on hope of a euro debt plan

BRITAIN’S FTSE 100 hit a five-week closing high yesterday with optimism rising that politicians can finally agree a deal to solve its debt crisis in a crunch week for the Eurozone.

European Union leaders, urged on anxiously by the United States, are seeking agreement on a convincing rescue plan that has eluded them for two years, culminating in a summit in Brussels on Thursday and Friday.

Mike Lenhoff, chief strategist at Brewin Dolphin said this Friday could “make or break” the Eurozone with the markets hopeful of the former.

“If Mrs Merkel (Germany’s Chancellor) gets her way with fiscal integration, market sentiment will be dramatically transformed. To say that equity markets, especially the banks, will have something to celebrate understates it,” he said, adding that would prompt a big exit out of bond markets.

London-listed banks have gained around 16 per cent over the last eight trading days, spurred by coordinated action by major central banks to provide liquidity to the financial system and on hopes a solution to Europe’s debt crisis might be found.

Yesterday, Lloyds Banking Group and Royal Bank of Scotland added 6.3 and 5.3 per cent, respectively, as France and Germany agreed on a series of reforms to address the Eurozone sovereign debt crisis that will be presented to EU President Herman Van Rompuy on Wednesday.

And with Italy drawing up its roadmap to deficit reduction and having been the biggest worry within the Eurozone recently, traders said there’s a belief that the worst might be over.

FTSE 350 banks and insurers which remain down respectively more than 25 and 10 per cent in 2011, hamstrung until Europe’s debt crisis is resolved, helped the FTSE 100 to rise 15.87 points, or 0.3 per cent, at 5,567.96, its highest close since 31 October.

Miners rallied too as investors looked to buy beaten down assets which have shed more than a quarter of their value this year as the global downturn left question marks over the outlook for growth.

JPMorgan said the European debt crisis, US fiscal austerity and prospects for a Chinese hard landing will keep volatility high and could result in lower markets in 2012 if these conditions worsen.

But it said a strong policy response from governments and a better-than-worst-case scenario for corporate earnings leaves some European equities looking attractive on valuation grounds.

“We believe selected cyclicals have been penalised too much, especially the emerging market sensitive ones. We find value in ‘low ROE’ (return on equity) and ‘Value' styles’, JPMorgan said in a note.

Elsewhere, International Airlines Group, formed by the BA and Iberia merger, climbed 2.9 per cent after it posted a 2.1 per cent rise in passenger traffic in November, boosted by 4.6 per cent growth in premium traffic.

On the downside, equities that have performed well in the last year fell as investors chased riskier assets.

Drugmaker Glaxo SmithKline fell 1.6 per cent, British American Tobacco shed 0.8 per cent, while Burberry, liked for its exposure to China and up more than 12 per cent in 2011, fell 3.4 per cent.

Investors also continued to penalise corporates falling short of expectations. Michael Page’s shares slumped after the British recruitment company warned its full-year profits will be towards the bottom end of forecasts.