AN IMPROMPTU press conference, held about 5am Belgium time, lit a small fuse under the Australian sharemarket yesterday afternoon.
Leaders attending the European summit told reporters in the wee hours 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 is aimed at enabling the eurozone's ?500 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 by the end of the year.
According to analysts, the reaction from Australian investors was a sign that expectations of anything being achieved at the summit were rock bottom: the benchmark index jumped 55 points in less than 30 minutes, while the dollar soared to almost $US102?.
The rally helped the S&P/ASX 200 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 big banks and miners finished 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," said Wingate Asset Management's Chad Padowitz.
"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."
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," Mr Whetton said.
However, he said futures 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."
Despite the optimism about the agreement, he said 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 jumped 33?, or 14.6 per cent, to $2.59 after the retailer received a $1.65 billion takeover offer from British-based EB Private Equity. The price surge was despite David Jones chairman Robert Savage saying he could find no public information on the bidder.