By Sara Sjolin, MarketWatch
LONDON (MarketWatch) — European stocks ended higher Friday, boosted by hopes European officials will take action to bring down Spanish and Italian borrowing costs after German Chancellor Angela Merkel and French President François Hollande vowed to protect the euro zone.
Equities were also buoyed as data showed the U.S. economy slowed less than expected in the second quarter.
Preview of the ‘12 London Olympics
WSJ's Cassell Bryan-Low previews the opening ceremony and the Journal's 2012 London Olympics video coverage.
Erasing early-morning losses, the Stoxx Europe 600 index /zigman2/quotes/210599654/delayed XX:SXXP +0.42% added 1.3% to close at 259.81, ending the week with a 0.6% gain. On Thursday, the index jumped 2.5% after European Central Bank President Mario Draghi pledged ”to do whatever it takes to preserve the euro.”
On Friday, French daily Le Monde, citing unnamed sources, said the ECB and European leaders were preparing joint action to bring down Spanish and Italian borrowing costs.
Under the plan, the rescue funds would be used to buy government bonds in the primary market, while the ECB would resume purchases of bonds in the secondary market. ECB, EU rescue fund plan joint action
German Chancellor Angela Merkel and French President François Hollande released a joint statement Friday saying they were determined to do “everything possible to protect the euro zone.” Merkel, Hollande vow to 'protect' euro zone
Cheering the move
Spanish and Italian bond yields continued to drop.
The yield on the 10-year Italian government bond declined 12 basis points to 5.94%, according to electronic trading platform Tradeweb. A basis point is 1/100 percentage point.
In Spain, the yield on 10-year paper fell 21 basis points to 6.71%. Spain’s 10-year yield had hit a euro-era record high around 7.60% earlier in the week.
Stocks in those countries also rallied. The Italian FTSE MIB index jumped 2.9% to 13,596.88, with UniCredit SpA /zigman2/quotes/200769686/delayed IT:UCG +2.78% surging 6%. On the week, the index gained 4.1%.
Spain’s IBEX 35 index /zigman2/quotes/210597995/delayed XX:IBEX +0.87% closed 3.9% higher to 6,617.60, up 5.9% on the week, partly boosted by heavyweight Banco Santander SA /zigman2/quotes/205677933/delayed ES:SAN +3.25% /zigman2/quotes/202859081/composite SAN +3.29% , up 6%.
However, the markets may be overreacting, said James Ashley, senior European economist at RBC Capital Markets, as there are still obstacles to overcome.
“The [German] Bundesbank said their view hasn’t changed at all and they don’t think bond buying is the best way to handle the crisis,” he said. Bundesbank opposes bond buys
Further haircuts for Greece
Greece also got pulled into the euro zone-debt spotlight, as Reuters reported that European policy makers were looking at ways to cut the country’s debt, with the ECB and national central banks taking losses on their holdings of Greek government bonds.