European Stocks, Euro Rally as ECB Boosts Lending

European stocks and the euro rose further on Wednesday after the ECB moved to boost lending and Spanish borrowing costs dropped, easing tensions over the Eurozone debt crisis, traders said.

The European Central Bank said it had injected a record 489.19 billion euros ($641 billion) into Eurozone banks via its first-ever three-year refinancing operation.

London's benchmark FTSE 100 index climbed 0.46 percent to 5,443.47 points approaching the half-way mark, while Frankfurt's DAX 30 gained 0.82 percent to 5,893.99 points and in Paris the CAC 40 won 0.83 percent to 3,080.41.

Madrid rose 0.53 percent and Milan advanced 0.25 percent.

The euro rallied to $1.3193 from $1.3078 late in New York on Tuesday.

But Eurozone bond rates rose, except French yields, despite the massive injection of ECB cash into the banking system.

European stocks and the euro had risen sharply on Tuesday as strong U.S. and German economic data plus a successful Spanish debt sale helped to ease concerns over the Eurozone debt crisis and fears of fresh recession.

"Equities continue their ascent higher today as the traders pile into the market ahead of the festive season," said ETX Capital trader Manoj Ladwa. "With the ECB unleashing close to half a trillion euros to prevent another credit crunch, the Santa rally seems well supported. But volumes are drying up as traders wind down for the holidays and any shock news announcement could see the current rally coming to an abrupt end."

Ten-year yields on several national bonds in the Eurozone had eased before the ECB's operation. But once the results were announced, yields firmed, except for France.

The French 10-year borrowing rate fell to 3.069 percent from 3.092 percent at the close on Tuesday. The 10-year yield on Eurozone benchmark German bonds firmed to 1.988 percent from 1.951 percent.

The Spanish 10-year rate, which had fallen early in the day to below 5.0 percent for the first time since October firmed to 5.097 percent from 5.030 percent. The Italian 10-year yield rose to 6.676 percent from 6.571 percent.

At Dutch banking and insurance group ING, economist Martin Van Vliet said: "The (ECB) allocation for three years today is the equivalent of nearly one and a half times the bond issuance programs of Spain and Italy in 2012."

Italian data showed that the economy contracted for the first time since 2009 under the weight of a deep debt crisis, shrinking by 0.2 percent in the third quarter.

The government says the economy is already in recession and is forecasting that gross domestic product (GDP) will shrink by 0.4 percent in 2012.

"The ECB and politicians will be hoping that today's provision of cheap liquidity will keep the temperature from rising any further under the Eurozone but the real test will be whether measures taken will allow Italy to meet its huge borrowing need next year," said Rabobank analyst Jane Foley.

The ECB said in a statement that it had fully allotted a total 489.19 billion euros in bids from 523 banks at rate of 1.0 percent.

That is higher than the previous record of 442 billion euros for a one-year auction in June 2009 and came in at the top end of analysts’ expectations for anywhere between 100-500 billion euros.

"It seems that the ECB's tactic of providing unlimited three-year loans to banks is finally having a positive impact on both credit and equity markets," said Spreadex trader Jordan Lambert.

"Initially an injection of liquidity was not seen as the solution to the unsustainable sovereign debt levels, although investors are now expecting the banks to use this extra cash to purchase bonds from the highly indebted nations.

"This has permeated confidence throughout the markets and lowered Italy's and Spain's borrowing costs to a more manageable level," he added.

Asian markets were firm as strong U.S. housing data and the previous day's successful bond issue by Spain added to an upbeat business and consumer outlook in Germany.

Dealers appeared to have overcome their nervousness seen earlier this week following news that North Korean leader Kim Jong-Il had died, leaving the nuclear-armed rogue nation in a state of uncertainty.

Tokyo rose 1.48 percent and Seoul surged 3.09 percent, while Sydney closed up 2.13 percent.

Regional traders were given a strong cue by Wall Street, where the Dow surged 2.87 percent Tuesday -- its strongest rally in four weeks -- after official figures showed new home starts jumped 9.3 percent in November.

The rise is the biggest since April 2010 when tax credits, which have since expired, were driving sales.