European stock markets and the euro fluctuated as investors tried to make sense of the deal struck by EU leaders earlier today (9 December), in the attempt to forge measures that would halt the slide of eurozone government bond markets after two years of deepening crisis.
The euro initially dipped as the market digested the agreement on tighter eurozone fiscal reforms, before clawing back losses on speculation the European Central Bank was buying bonds issued by debt-stricken Italy.
The Stoxx Europe 600 Index was up 0.2% at 238.12. London's FTSE 100 was flat at 5486.44, Frankfurt's DAX was 0.2% higher at 5885.35 and Paris's CAC-40 gained 0.7% to 3116.13.
The benchmark 10-year Italian bond was 0.2 percentage point higher at 6.58%, having climbed earlier to 6.65%, while the two-year yield was 0.03 percentage point higher at 6.06%. Spain's 10-year bond was 0.11 percentage point higher with a yield of 5.84%, and France's 10-year bond was up 0.05 percentage point to 3.28%.
European Central Bank President Mario Draghi hailed the decision reached this morning a step forward for the stricter budget rules he has said are necessary if the 17-nation eurozone is to emerge stronger from two years of market turmoil.
"It's going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members," Draghi said. "We came to conclusions that will have to be fleshed out more in the coming days."
Merkel welcomes deal
German Chancellor Angela Merkel said she was very satisfied with the decisions. The world would see that Europe had learned from its mistakes and avoided "lousy compromise", she said.
Merkel, Europe's most powerful leader, said she had not given up hope that Britain would eventually agree to change the EU treaty to anchor stricter budget discipline.
Active ECB support will be vital in the coming days.
Irish Europe Minister Lucinda Creighton said Dublin and many other member states expect the central bank to take a more pro-active approach to the debt crisis in the weeks ahead. Traders said the ECB bought Italian bonds on Friday to steady markets.
The euro, shares and commodities fell in Asia because of growing doubts about whether Europe can forge a convincing financial firewall to arrest contagion in bond markets, but the currency regained ground in Europe and European stocks were narrowly higher.
"Markets need to know where we are going, how we're getting there, and they need to know how long it's going to take. Where we are going, I believe, is toward a more unified and serious Europe in budgetary terms," said François Pérol, chief executive of BPCE, France's second largest bank.
The ECB cut interest rates yesterday (8 December) and offered banks unlimited cash for three years while damping speculation the ECB will buy more government bonds to ease the debt crisis.
"Fiscal discipline can't be achieved overnight and in the meantime, credit contraction will intensify, so the most urgent task for policymakers is to ensure decisive measures are taken to put a firm cap on bond yields and relieve funding pressures," said Takeo Okuhara, a fund manager at Daiwa SB Investments in Tokyo.
"The headlines stepped up more pressure on the European Central Bank to expand its bond purchases and to have common eurozone bonds as these are the only ways to contain the debt crisis from falling into a negative spiral," Okuhara told Reuters.