German bailout fund approval lifts global stocks, euro

German bailout fund approval lifts global stocks, euro

(Reuters) - Germany's top court lifted global shares to a five-month high, boosted Italian and Spanish bonds and sent the euro to its highest since early May, by finally giving its go-ahead to the euro zone's new crisis-fighting fund.

German approval of the 700 billion euro European Stability Mechanism (ESM) was crucial to boost the euro zone's crisis-fighting powers and a key requirement for the European Central Bank's new plan to buy the bonds of struggling euro members.

European shares .FTEU3 were up 0.5 percent after the decision, having been up just 0.07 percent beforehand. The MSCI global share index .MIWD00000PUS which is up 6.5 percent since the end of July, hit a five-month high of 331.99 points before dipping back slightly as bouts of profit-taking set in.

"The (equities) market will rally on this, and the financials will lead this rally," said Gerard Lane, Equity Strategist at Shore Capital. "The fear was they were going to say ‘nein', so the 20 percent down in the market that we could have had is off the table."

Investors breathed a sigh of relief that the ESM can finally take effect after months of delay, with its ability to buy bonds directly from governments - the ECB can only buy from bond holders - and help recapitalize struggling banks.

The euro has been the best performing major global currency since ECB President Mario Draghi pledged to do whatever was necessary to "preserve" it back at the end of July.

It hit a four-month high of $1.2906 versus a broadly weaker dollar in anticipation of a favorable decision from the Karlsruhe-based German Constitutional Court and rose to a two-month high against sterling after the ruling.

The rises pushed it through various levels of technical resistance, and analysts were eyeing further gains.

"We would expect the euro-dollar recovery to extend further in the near term. We maintain our buy on pull-backs strategy, although pull-backs have remained very limited so far," strategists at Morgan Stanley said in a note.

PERIPHERAL VISION

Bond markets also reacted positively to the decision. Bund futures, traditionally an indicator of risk-adversion, fell to their lowest level since the start of July. In contrast Spanish and Italian bonds rallied, with yields down 10 and 6 basis points, respectively.

"It's the long end (of bond maturities) now where we need to see a move, but for that to happen we need the country (Spain) to activate the (ECB) program and clarity from the EFSF/ESM on whether they want to support the long end," said ING strategist Alessandro Giansanti.

That could be edging closer. Spain continues to study the price it will have to pay for seeking help from the ECB's bond-buying program, but improved market conditions may make aid unnecessary, Prime Minister Mariano Rajoy told Spanish parliament.

Adding to the good mood, euro zone authorities also made progress with their plans to synchronize banking supervision and the way they deal with bankrupt institutions.

European Commission President Jose Manuel Barroso outlined the proposal in his annual "state of the union" address in Strasbourg, plans which would see the ECB take over the monitoring of all banks in the bloc.

Oil prices were also lifted by the euro zone euphoria. Brent crude oil rose more than $1 per barrel to a one-month high, while labor unrest sweeping across South Africa's mining sector pushed up platinum prices.

Geopolitical risk, which has been supporting oil since tension between Iran and Israel escalated earlier this year, came back into focus on reports the U.S. ambassador to Libya and three other embassy staff had been killed in a rocket attack.

"HOPIUM" HIGH

U.S. stock markets were expected to grab the baton from Europe and open in positive territory.

Hopes that the Federal Reserve will lay out plans on Thursday to inject another dose of stimulus into the economy helped the Dow industrials index to its highest level in nearly five years on Tuesday.

The unveiling of Apple's (AAPL.O) latest incarnation of its blockbuster iPhone is the top event of the day for investors and tech-geeks alike. It is widely expected to offer 4G technology for the first time and a bigger 4-inch screen.

Facebook (FB.O) will also be in the spotlight after CEO Mark Zuckerberg soothed investors in his first major public appearance since the social network's rocky May IPO, with hints of new search and mobile-phone-focused products.

"Markets are riding high on 'hopium'," said Kit Juckes at Societe Generale. "We didn't listen to the conditions that came with the German constitutional court decision, we are now heading towards the Fed, so the Americans are going to come in to find risk is firmly on."