European shares hit a 5-month high on strong earnings, dovish ECB

European shares hit a five-month high on Friday as one the biggest weekly drops in the euro this year buoyed investors' moods.

The euro fell after the European Central Bank signalled it would tread carefully as it removes stimulus, and as the dollar kicked higher on signs that US President Donald Trump is pushing ahead with tax cuts and could install a more hawkish head of the Federal Reserve.

Stocks gains were also underpinned by strong earnings that boosted bank shares such as UBS and Royal Bank of Scotland, while tech stocks gained following upbeat earnings reports from US giants Alphabet, Microsoft and Amazon.com.

Europe's STOXX technology index rose 1 per cent to its highest in almost 16 years. The wider pan-European FTSEurofirst climbed 0.5 per cent and euro zone blue chips were set for their ninth straight week of gains.

"I think it's a continuation of yesterday's European Central Bank update," said CMC Markets analyst David Madden.

"Mr. Draghi will be certainly happy with himself because he likes to talk the currency down and that's exactly what he's done - a weaker euro leaves it more attractive to buy euro zone stocks."

Europe's gains also dragged MSCI world equity index back into positive territory for the day, though it was still on course for its first weekly fall in seven weeks, mainly driven by weaker emerging markets.

The euro hit a three-month low of $1.1616, down 0.2 per cent on the day having notched its biggest one-day drop of year on Thursday following the ECB's announcement.

While the central bank will cut its stimulus in half from the start of next year, it will stretch it out towards the end of 2018 and actually rate hikes are even further off..

Investors in Spain appeared to be looking beyond a parliamentary vote for Madrid to impose direct rule over Catalonia in a crisis over a secession vote.

The premium investors demand to hold Spanish government bonds over benchmark German peers held near one-month lows on Friday.

The relative calm in markets is in contrast to the bouts of volatility seen since Catalonia staged its independence referendum on Oct. 1, ruled illegal by Spanish courts.

"For investors, it is a case of waiting to see exactly as and when an election is called, whether that is the current Catalan government calling it themselves or having it imposed upon them by Madrid," Rabobank strategist Matt Cairns said.

Spanish 10-year bond yields fell 3 basis points to 1.53 per cent on Friday, having fallen 10 bps on Thursday in their biggest daily drop in six months.

That kept the gap with German peers - which fell 2 bps to 0.43 percent on Friday - to around 110 bps, the tightest level in around a month.

Oil on the boil

Earlier in Asia, Japan's Nikkei gained 1.3 per cent. MSCI's broadest index of Asia-Pacific shares outside Japan was flat, while Hong Kong and South Korean shares gained 0.7 per cent in local currency.

The dollar index, which tracks the greenback against a basket of six major rivals, added 0.2 per cent to 94.800 .DXY, trading at three-month highs and on track for a weekly gain of 1.1 per cent.

It also traded above parity against the Swiss franc for the first time since mid-May, reaching a high of 1.00035 francs per dollar in morning European trade.

Investor attention remains on candidates to head the US Federal Reserve when Janet Yellen's term expires in February.

Trump's search for the next central bank chair has come down to Fed Governor Jerome Powell and Stanford University economist John Taylor, Politico on Thursday cited one source as saying. A White House official told Reuters that no final decision has been made.

Elsewhere in currencies, the Australian dollar fell to 3 1/2-month low of $0.7625 after Australia's conservative coalition government lost its one-seat parliamentary majority following a High Court ruling that Deputy Prime Minister Barnaby Joyce is ineligible to remain in parliament. The court has now ordered a by-election for Joyce's seat.

It was last 0.2 per cent lower at $0.7646.

A emerging market selloff was in danger of snowballing meanwhile, as South Africa's budget woes sent the rand to an 11-month low, Turkey's lira dropped for a sixth day and EM bond and stock markets racked up a second week of losses.

In commodities, Brent crude futures held firm after closing at a 27-month high on Thursday as the market focused in on Saudi Arabia's comments about ending a global supply glut, brushing off an unexpected increase in U.S. crude inventories and high U.S. production and exports.

Brent stood little changed at $59.37 a barrel, just below Thursday's high of $59.55.

U.S. West Texas Intermediate crude fetched $52.61 a barrel, almost flat from Thursday's six-month closing high.

 

(Reporting by Ritvik Carvalho; Editing by Alison Williams)