An impromptu media conference, held at about 5am in Belgium, lit a small fuse under the local sharemarket yesterday afternoon.
Leaders attending the European Summit chose the wee hours of the morning there to tell reporters that they had agreed to use the region's permanent bailout fund to recapitalise Europe's ailing banks, including banks from countries that had not already received assistance.
The agreement would enable the eurozone's ?500 billion ($618 billion) bailout fund to recapitalise struggling banks directly, without passing through national budgets and adding to the debt burden of struggling countries.
But this would happen only after a Europe-wide banking supervisory body was established, hopefully at the end of the year.
According to analysts, the reaction by Australian investors was a sign that expectations of anything being achieved at the summit were rock bottom: the bourse jumped 55 points in less than 30 minutes, while the dollar soared US1.3?.
Nevertheless, the rally helped the sharemarket close the week more than 1.1 per cent higher, up 46.4 points at 4094.6, for the first positive weekly close in a month.
The news helped Australia's banks and big miners to finish in positive territory, as investors returned to growth-linked stocks.
BHP Billiton rose 72? to $31.45, and Rio Tinto climbed $1.34 to $56.50. The financial sector rose 1.2 per cent.
"It looks like the weaker countries succeeded in strong-arming Germany to [step away from] its one-sided view of pure austerity," Chad Padowitz, of Wingate Asset Management, said.
"I suspect Spanish and Italian bond yields will now come down, but the market's got a very efficient way of showing whether it thinks news is credible or not, so we'll see how that plays out in the next couple of days."
The Nomura rates strategist Martin Whetton said the announcement came in the middle of what had been a quiet trading day and caused Australian bond futures to fall sharply.
"There was a rather dramatic fall which was exacerbated by the liquidity," he said.
However, he said future prices regained some of their losses during the afternoon.
"[The selloff] went too far and the market bounced back about 50 per cent of the fall."
Mr Whetton said that, despite the optimism surrounding the agreement, it was not enough to solve the eurozone's sovereign debt crisis.
"It's still not over, it doesn't solve a whole lot just yet," he said.
In one of the stranger moments yesterday, David Jones shares rose 33?, or 14.6 per cent, to close at $2.59 after the upmarket retail chain apparently received a $1.65 billion takeover offer from UK-based EB Private Equity. That was despite David Jones' chairman, Robert Savage, saying he could not find any public information about the entity.
Frequently Asked Questions about this Article…
What did European leaders agree at the summit about using the eurozone bailout fund?
Leaders agreed the eurozone's permanent bailout fund (about €500 billion) could be used to recapitalise struggling banks directly, without routing funds through national budgets — but that would only take place after a Europe-wide banking supervisory body is established, hopefully by the end of the year.
How did Australian markets react to the summit announcement and why does it matter for investors?
Australian markets jumped sharply on the news: the local sharemarket rose quickly (about a 55-point move in under 30 minutes) and finished the week up 1.1% — the first positive weekly close in a month. The Australian dollar also strengthened. This shows that policy announcements can trigger fast market moves, creating both opportunities and short-term volatility for investors.
What happened to major miners like BHP Billiton and Rio Tinto after the news?
The rally helped growth-linked stocks: BHP Billiton rose to $31.45 and Rio Tinto climbed $1.34 to $56.50, reflecting investor rotation back into big miners after the summit announcement.
How were Australian banks and the financial sector affected by the European deal?
Australia's banks and the broader financial sector finished in positive territory, with the financial sector up about 1.2% as investors returned to growth-linked and financial stocks on the expectation that the fund could ease contagion risks in Europe.
What did the summit announcement do to bond markets and bond futures?
The announcement caused Australian bond futures to fall sharply at first — a move that was amplified by low liquidity — but futures regained around half of those losses later in the afternoon, according to market strategists quoted in the article.
Does using the bailout fund to recapitalise banks mean the eurozone sovereign debt crisis is solved?
No. While the announcement produced optimism, analysts such as Nomura's Martin Whetton warned it does not yet solve the eurozone's sovereign debt crisis — the market will test the credibility of the plan in the days ahead.
Why did David Jones shares spike and is there confirmation of a takeover bid?
David Jones shares jumped about 14.6% to $2.59 after an apparent $1.65 billion takeover offer from UK-based EB Private Equity was reported. However, chairman Robert Savage said he could not find any public information about that bidder, so the takeover was not clearly confirmed in the article.
What practical steps should everyday investors consider after this European summit news?
The summit shows policy moves can quickly change market sentiment. Everyday investors should be prepared for short-term volatility, avoid making knee-jerk decisions based solely on one headline, and monitor key developments such as the establishment of a European banking supervisor and shifts in bond yields to reassess portfolio risk exposure.
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