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Investors breathed a sigh of relief on Monday after Portugal prevented the collapse of one of its biggest banks, putting some life back into European stocks following last week's slide and pushing bond yields lower across the board.
Lisbon on Sunday announced a near 5 billion-euro rescue of the country's largest listed bank Banco Espirito Santo, preventing its collapse and potential contagion across the continent's banking sector.
This dovetailed with easing fears of higher US interest rates following Friday's US employment report, and eclipsed growing geopolitical concerns surrounding the Middle East and effect of Western trade sanctions on Russia.
"The market's initial reaction is that it's pretty reassuring to see Portugal moving quickly to rescue BES. Overall, it eases systemic fears that had resurfaced last week," Saxo Bank sales trader Andrea Tueni said.
"But it's not enough to spark a real rebound in the overall market. This is mostly a technical bounce from last week's slide and the trend remains negative for now," he said.
In early trade on Monday the FTSEurofirst 300 index of leading shares was up 0.2% at 1,335 points, led by a 0.8% rise in pan-European banking stocks.
Euro zone financials were up 1.3% and Portuguese banks were up 6%. Shares in BES were still suspended.
Germany's DAX rose 0.2% to 9,226 points, France's CAC 40 was up 0.5% at 4,223 points and Britain's FTSE 100 index was up 0.2% at 6,692.
European shares led the losses last week as concern mounted over tension between Russia and the West, as well as the BES crisis which saw its share price plunge 50% on Friday alone.
It was a more mixed picture in Asia. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4%, largely as Chinese shares continued to rally on signs that the economy was regaining momentum, but Japan's Nikkei average hit a one-week low.
The three main indices on Wall Street pointed to a higher open on Monday of around a third of 1%. The S&P 500 fell 2.7% last week, its biggest weekly decline in more than two years.
FED FEARS EASE
Europe's bond markets showed a similar sense of relief, with yields on Portuguese, Spanish and Italian bonds all down by five or six basis points.
The rate-sensitive two-year notes yield was little changed at 0.47% and the 10-year yield fell two basis points to 2.49%.
Bond yields were also capped by Friday's US jobs data for July, which showed job growth lower than forecast, the unemployment rate higher than expected, and perhaps most importantly almost no growth at all in average hourly earnings.
A Reuters poll on Friday after the jobs data showed that a majority of top Wall Street bond firms saw no rise in US interest rates before the second half of next year.
There's been no shortage of reasons to keep investors on their guard either, from Argentina's debt default last week to the spreading violence and tension across the Middle East, to the economic consequences of the West's sanctions on Russia.
About 40 European blue-chips, including many German companies, derive more than 5% of their revenues from the Russian market.
"We have lowered our euro area GDP growth projections in response to deteriorating trade relations with Russia," Barclays economists said in a note on Monday, now predicting 0.9% growth this year, down from 1.0%, and 1.4% next year, down from 1.6%.
All major currencies were flat on Monday compared with late New York levels on Friday. The euro was at $1.3427, off last week's 8-month low of $1.3366, while the dollar stood at 102.55 yen, off Wednesday's four-month peak of 103.15 yen.
US crude oil futures edged up to $98.09 per barrel CLc1, recovering from a six-month low of $97.09 on Friday, and gold was little changed at $1.295 an ounce.
