Hopes Grow for Return to Confidence in Europe

There is still time for European leaders to avert disaster in the euro zone, with optimism growing in the markets ahead of Friday's key summit, analysts and investors told CNBC Thursday.

Photo: Bloomberg | Getty Imgaes

"You will hopefully see some confidence returning to the European scenario, even though they obviously have baked the cake of a pretty dreadful first quarter," Peter Toogood, Head of Investment, Old Broad Street Research, told CNBC.

He admitted that it is "pretty easy to be bearish" at the moment and warned that a return to confidence depends on European leaders reaching agreement on a new package of measures to limit the euro zone crisis.

There will be yet another summit of European leaders on Friday, although German officials have dampened hopes of a final resolution ahead of the meeting.

Standard & Poor's put the entire euro zone and European banks on negative watch this week, causing consternation in the markets.

Key players including German Chancellor Angela Merkel, French President Nicolas Sarkozy and European Central Bank President (ECB) Mario Draghi will meet ahead of the summit in Brussels on Thursday afternoon.

"Politicians have a two-three month period to get their act together and find resolution," Thanos Papasavvas, Strategist, Fixed Income & Currencies at Investec, told CNBC Thursday.

"Hopefully this resolution will be today or tomorrow, but there's still a little more room if not."

"After that point, the yields in Italy and other peripheral economies will become unsustainable," he warned.

Merkel and Sarkozy have spent much of this week working out new proposals for greater budget discipline and more fiscal integration in the EU.

"It’s going to be a matter of a promise and whether that promise is realized or not," Dan Morris, Global Strategist, JP Morgan Asset Management, told CNBC.

"All of this is going to play into volatility and given that it's going to be so news-driven and driven by unpredictable politicians, knowing when the next bomb drops is going to be very difficult."

The market is expecting the ECB to cut interest rates by 25 basis points Thursday.

Any signs that the central bank will up its bond-buying program will be closely scrutinized.

There are also increasing worries about emerging markets after soft gross domestic product growth figures for Brazil earlier this week.