Europe deal brings fireworks

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.