European stocks posted their biggest weekly rally in three years as central banks moved to ease the region’s debt crisis and China increased cash supply for its banks to speed up growth in the world’s second-largest economy.
The STOXX Europe 600 Index jumped 8.7 percent to 240.73, its largest weekly advance since November 2008, as central banks cut the interest rate on US dollar funding, China reduced its bank reserve ratio and eurozone policymakers planned to channel as much as 200 billion euros (US$270 billion) through the IMF to fight the debt crisis. The benchmark gauge has rallied 12 percent from this year’s low on Sept. 22 and trimmed its losses this year to 13 percent.
EU President Herman van Rompuy will make proposals toward closer fiscal union among eurozone nations at summit on Friday, German Chancellor Angela Merkel said.
“On Dec. 9, all those domino pieces will be in place to kick in the bull rage,” said Wolfgang Matejka at Matejka and Partner Asset Management in Vienna. “You will see some efforts that can give the solution to the European crisis for the long term.”
Germany and France are leading the push for tougher enforcement of budget rules to counter the debt crisis now in its third year.
European Central Bank (ECB) President Mario Draghi, who has criticized the region’s leaders on their response to the crisis, signaled that the central bank could do more to help if governments pushed the eurozone toward fiscal union.
“A new fiscal compact” is needed to start restoring credibility,’’ Draghi said in Brussels. “Other elements might follow, but the sequencing matters.”
He did not specify what more the ECB could do and said its buying of European sovereign bonds to stem the crisis “can only be limited.”
“The ECB looks increasingly likely to take an enhanced role in dealing with the eurozone debt crisis,” said Ronald Doeswijk, an investment strategist at Robeco Group in Rotterdam, the Netherlands. “As that should prompt a relief rally, the outlook for equities has improved.”
National benchmark indices climbed in every Western European market during the week, except Iceland. France’s CAC 40 Index and Germany’s DAX Index increased 11 percent. The UK’s FTSE 100 Index rose 7.5 percent.
A European proposal to channel central bank loans through the IMF may deliver as much as 200 billion euros (US$270 billion) to fight the debt crisis, two people familiar with the negotiations said. The need for a new crisis-containment tool emerged as the effort to boost the 440 billion euro rescue fund to 1 trillion euros fell short.
Under the proposal, national central banks would recycle funds through the IMF, potentially to underwrite precautionary lending programs for Italy or Spain, the two countries judged to be the most vulnerable now, the people said.