By Aude Lagorce, MarketWatch
LONDON (MarketWatch) — European stocks extended their rally Thursday on continued speculation that the European Central Bank may take decisive steps to douse the sovereign-debt fire threatening the region when it meets later in the session.
The Stoxx Europe 600 index (ST:STOXX600 268.88, +1.77, +0.66%) advanced 0.8% to 269.29, led by financial and commodities shares.
The index snapped a three-session losing streak Wednesday to close up 2%. Bonds and the euro also rallied as markets interpreted comments from ECB President Jean-Claude Trichet as a sign policy makers may intervene more aggressively to halt the sovereign-debt crisis that has already engulfed Greece and Ireland and is now threatening Spain and Portugal.
At its meeting on Thursday, the ECB is expected to leave its benchmark interest-rate unchanged at a record low of 1%.
That decision is due at 1.45 p.m. Frankfurt time and followed 45 minutes later by a press conference with Trichet.
“I think there is a bit of relief in markets around anticipation that we might see a firmer policy response to the sovereign debt crisis from European authorities,” said Bernard McAlinden, strategist at NCB Stockbrokers.
He said speculation of more aggressive action has been fueled by the recent change of tone at the ECB and a report from Reuters, citing an unnamed source, late Wednesday that the U.S. would be open to facilitating an increase in the European financial stability facility via the International Monetary Fund.
McAlinden cautioned, however, that the ECB merely saying it's expanding its bond-purchasing program may not be enough to satisfy markets.
Spanish benchmark extends gains
The prospect of more aggressive and concerted action from EU authorities helped Spain’s IBEX 35 (XX:IBEX 9,914, +235.90, +2.44%) extend Wednesday’s 4.4% rally. The index rose 2.8% at 9,956.90 in morning trading, posting the biggest gain among western European stock indexes.
In the financial sector, BBVA (ES:BBVA 7.86, +0.27, +3.53%) and Banco Santander (ES:SAN 8.11, +0.28, +3.60%) both rallied nearly 4%.
In an interview with CNBC television late Wednesday, Spanish Prime Minister Jose Luis Rodriguez Zapatero said that Spanish bond holders will not have to take “haircuts” and insisted the nation’s banking system is “definitely healthy.”
The Spanish government successfully sold on Thursday around 2.47 billion euros ($3.24 billion) in three-year bonds at a maximum yield of around 3.8%. The yield rose sharply from a previous sale.
Other peripheral markets also advanced. Portugal’s PSI 20 gained 1.9% to 7,682.27 and Italy’s FTSE MIB climbed 1.5% to 19,854.
Commodities rally
Among the main regional indices, France’s CAC 40 (FR:PX1 3,701, +32.20, +0.88%) gained 1.1% to 3,708.91, Germany’s DAX 30 (DX:DAX 6,893, +26.79, +0.39%) edged up 0.4% to 6,895.07 and the U.K.’s FTSE 100 (UK:UKX 5,692, +49.16, +0.87%) rose 0.9% to 5,693.70.
The European rally was led by mining stocks, which are especially sensitive to economic growth prospects. Shares of Rio Tinto PLC (UK:RIO 4,322, +115.00, +2.73%) (RIO 66.53, +2.40, +3.74%) advanced 2.9% and Antofagasta PLC (UK:ANTO 1,382, +21.00, +1.54%) climbed 1.3%.
Oil-related stocks also provided support, with shares of BP PLC (UK:BP. 438.90, +9.05, +2.11%) (BP 40.62, +0.62, +1.55%) up 1.4% and Royal Dutch Shell Plc (UK:RDSA 1,999, +10.00, +0.50%) gaining 0.4%. Goldman Sachs on Thursday said European integrated oil companies will see 26% earnings growth in 2011.
The financial sector was in the green again after a good session Wednesday. Shares of UBS (CH:UBSN 15.64, +0.17, +1.10%) (UBS 15.52, +0.45, +2.99%) gained 2.9% in Zurich while Deutsche Bank AG (DE:DBK 38.30, +0.35, +0.91%) rose 1% in Frankfurt.
Among individual stocks, shares of TNT (NL:TNT 19.78, +0.93, +4.94%) rallied 5% after the postal and express group said it doesn’t need to issue shares to finance the demerger of its Express unit.
