london 06 29, 2012, 16:50 IST
The euro climbed and global shares jumped on Friday after euro zone leaders agreed measures to cut borrowing costs in Spain and Italy and eventually recapitalise the region's banks.
There was no movement towards common euro zone bonds, which leaders including Italy's Mario Monti and France's Francois Hollande have called for, but with expectations at rock bottom before the Brussels summit, the deal caught markets by surprise.
Ten-year Spanish and Italian bond yields were down 20-28 basis points to 6.64 and 5.99 percent, respectively, and the common currency rose more than 1.2 percent on a flurry of stop-loss buying to as high as $1.2628, well clear of a low of $1.2407 on Thursday.
It later settled under $1.2600, with resistance at the June highs of $1.2748.
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Safe-haven German bonds headed lower - briefly pushing yields above their U.S. equivalents for the first time since early February - while prices for gold, oil and copper all rose.
After all-night talks that pitted Rome and Madrid against European paymaster Berlin, the leaders of the 17-nation currency bloc agreed that euro-area rescue funds could be used for sovereign debt purchases without forcing countries to adopt extra austerity measures.
They also agreed that, once a single supervisory body for euro zone banks has been created, the funds could be lent directly to banks for recapitalisation.
German Chancellor Angela Merkel was quick to state that new aid would not flow without "conditionality".
VERY LONG ROAD
"It is one step on a very long road," said Charles Diebel, head of market strategy at Lloyds Bank. "But we don't have any details, and arguably the detail is where the risk lies, because the market will start to pick holes in it as we've seen previously."
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ in London said among questions the market will ask is whether the firepower available to the rescue funds will be enough to stabilise the 2.5 trillion euro Spanish and Italian bond markets, and how easy it will be to agree on the banking supervisory mechanism.
"Our initial view is this deal is no game-changer, and any EUR/USD rally will simply offer attractive levels to sell," he said.
"By and large we're still in a situation where the bond yields for many European countries are too high, and the growth rates are too low," said Andrew Milligan, Head of Global Strategy at Standard Life Investments. "We really didn't see any actions by the authorities last night which are going to have a material impact on either of those."
PRIMING THE BIG BAZOOKA?
Sean Callow, senior currency strategist at Westpac in Sydney, said there was good news in the deal for the risk markets, but this was small arms fire, not the "big bazooka" of common euro bonds.
European shares hit a high for the week; the FTSE Eurofirst 300 index rose 1.6 percent, with banks up 2.3 percent, helping MSCI's world equity index to gains of just over 1.1 percent.
U.S. stock futures suggested Wall Street would follow suit, with futures for the S&P 500, the Dow Jones and the Nasdaq 100 rising 0.9-1.3 percent.
"Although this had caught the markets a little off guard, the spike higher was a relatively minor move when you account for the market being considerably short at the time of release," Andrew Taylor, market strategist at GFT Global, said in a note.
"Stocks are not exactly rising at the moment, they opened with an upside gap, and that's it for now," said David Thebault, head of quantitative sales trading, at Global Equities, in Paris.
"We're slowly moving towards euro bonds, and the way policymakers communicate and manage market expectations is getting much better."
Investors are now turning their focus to the European Central Bank's meeting next week, with expectations of a rate cut.
Oil rose by more than $2, gold jumped over 1 percent and copper gained the most since mid-April on the last trading day of June, though the quarter is still bound to be the worst in years for oil and gold.
Brent crude for August delivery touched a high of $93.80 and was up $2.24 at $93.60 a barrel at 1043 GMT. U.S. crude was up $2.29 to $79.98, pulling away from an eight-month low hit in the previous session.
Spot gold rose 1.3 percent and hit a session high of $1,571.89 an ounce.
(Editing by Philippa Fletcher)