European Stocks Extend Rally on Draghi's Hint at Stimulus -- 2nd Update

By Tommy Stubbington 

European stocks extended their rally Tuesday, buoyed by European Central Bank President Mario Draghi's speech late last week that suggested further stimulus could be on the way for the region.

Mr. Draghi's speech on Friday, in which he called for action to spur growth, had sent the euro to an 11-month low against the dollar, and propelled a swath of euro-zone government bonds to record highs.

The common currency rebounded slightly on Tuesday, adding 0.2% to trade at $1.3202, but equity markets remained robust, with the Stoxx Europe 600 index closing 0.7% higher on the day, having already clocked a 1.1% rise in Monday's session.

Strategists said that the market's optimism was justified to an extent, but cautioned that any hopes of imminent ECB action would likely be dashed.

"To me, the reaction, especially in equity markets, looks a little bit knee-jerk and indicates that the market may have moved a little too much too fast," said David Vickers, a portfolio manager at Russell Investments in London said.

Royal Bank of Scotland PLC credit strategist Alberto Gallo, meanwhile, said that while Mr. Draghi's speech did put the potential for quantitative easing on the table, it would be wrong too read too much into his words.

"Any major program is unlikely before the end of October and more possible at the December meeting," he said, adding that the ECB is most likely to want to gauge the impact of its June measures and to assess the take up of the targeted longer-term refinancing operation before taking further action.

Most major indexes, however, stubbornly followed their pan-European counterpart higher.

The U.K.'s FTSE 100 added 0.7% on the day, as it played catch-up after a public holiday, while Germany's DAX ended the session up 0.8%.

France's CAC 40 was one of the strongest performers across the region, adding 1.2% with investors seemingly unperturbed by President François Hollande dissolving his government after a public quarrel within his cabinet over how to cure the ills of the euro zone's second-largest economy on Monday.

Some even suggested, that the move was for the better.

"From a market perspective, we believe that the departure of (economy minister Arnaud) Montebourg, who was seen as leaning toward the more interventionist left, will be seen as a positive," economists at Nomura wrote in a note.

"Also, press reports suggest the new government may lean toward the center in terms of nominations of new cabinet members, which should also be welcomed by markets as it might be seen as a move toward accelerating the reform agenda," they added.

In the U.S., the equity rally retained momentum too, with the S&P 500 surpassing the 2,000 mark yet again, buoyed by consumer confidence rising more than expected in August.

Earlier on Tuesday data also showed that orders for durable goods, or big-ticket manufactured items, surged 22.6% to $300.1 billion in July in the U.S., from the prior month.

Back in Europe, ArcelorMittal SA was one of the top risers of the day, after UBS AG raised its recommendation on the steelmaker to buy from sell. At the other end of the index, copper producer Antofagasta PLC saw its stock slip after earnings missed consensus.

In bond markets, the German 10-year yield was steady at 0.95%, close to Monday's all-time low. Yields in Spain, Italy, and Portugal all chalked up fresh lows too. Yields fall as prices rise.

In commodities, gold climbed 0.4% to $1,284.40 a troy ounce, while Brent crude oil was steady on the day at $102.72 a barrel.

Write to Tommy Stubbington at [e-mail] and Josie Cox at [e-mail]