Europe Markets

European Shares Surge, Led by Banks


European stocks surged 2.3 percent on Friday to their highest close in ten days, driven by banks which jumped after Citigroup's update underscored hopes the worst was over in the global credit crisis.

The FTSEurofirst 300 index of top European shares ended unofficially 2.3 percent higher at 1,325.38 points, its highest close since April 7. The index has risen 5 percent in April, putting it on track for its best month since October 2003.

UBS rose 5.4 percent, Santander 3.4 percent and Societe Generale 5.9 percent.

Pharmaceuticals also rose, with Novartis up 3.3 percent after a Morgan Stanley upgrade, while Roche gained 3.7 percent, bouncing back from recent weakness.

The market got a boost from Citigroup in afternoon trading.

The largest U.S. bank, reported its second straight quarterly loss, hurt by more than $15 billion in writedowns and increased reserves for credit losses, but analysts said that the numbers would ease investor worries.

"That's not bad at all, compared with what we were expecting," said Justin Urquhart Stewart, investment director at 7 Investment Management, in London.

Citi's results included $6 billion in writedowns and credit costs tied to subprime mortgages, $3.1 billion in writedowns for loans to fund corporate buyouts, and a $3.1 billion increase in credit costs related to consumer lending.

The company also wrote down $1.5 billion of its exposure to bond insurers and $1.5 billion for auction-rate securities.

"We are moving into a phase now where the banks are identifying the quantum of the losses. The reason the Royal Bank of Scotland will be looking to increase their cushion of support, is that they know they can only come to the well once to draw water. If banks can draw a line under this then you're okay," Urquhart Stewart said.

Royal Bank of Scotland was up 4.9 percent.

An industry source told Reuters the bank was set to announce a rights issue next week, in a move which analysts believe could raise over $20 billion and lead to similar action by other UK banks.

"All the announcement of capital increases are obviously good news and it reassures the market that there will be no other Bear Stearns, which is the only message that counts. Earnings are not really important for banks at this point," said Arthur van Slooten, strategist at Societe Generale, in Paris.

Energy shares rose as oil prices dipped after reaching record highs but remained buoyant.

Total was up 1.5 percent and BP was up 1.1 percent.

But despite Friday's rally, analysts said risks remain for stocks as the U.S. economic downturn will prompt companies to lower their outlooks.

"Profit warnings in non-financial sectors are not yet integrated in the market. And that is why there are such sharp corrections like Nokia yesterday," van Slooten said.

"When profit warnings kick in, industrial stocks could react much more negatively than for the financials when they report bad results and writedowns. Just look at General Electric and Nokia."