Financial stocks led European share markets higher on Thursday in thin trade, while the euro rose, on hopes the nearly half a trillion euros in three-year funds that banks have borrowed from the region's central bank will ease current funding strains.
The European Central Bank, in its first-ever three year tender, lent 523 banks a record 489 billion euros ($638 billion) on Wednesday, well above the 310 billion euro take-up forecast.
Despite the scale of the funding operation, analysts said it did not represent a fundamental fix for the debt problems facing the euro zone and any gains are likely to be limited.
In the longer-term the liquidity provided yesterday is not going to solve the debt crisis, it is not going to help southern European countries with their problems in getting control of their public debt, said Niels Christensen, FX strategist at Nordea.
The euro rose 0.5 percent to a session high of $1.3120, holding above an 11-month low of $1.2945 hit last week with traders seeing major support around $1.30, the December 14 low. The euro briefly touched a one-week high near $1.32 on Wednesday.
We are seeing a little bit of short-covering and equity markets are in positive territory opening up. There is a little bit of risk appetite this morning, Christensen said.
European shares started higher with the pan-European FTSEurofirst 300 index of top shares gaining around 0.7 percent in early trade while the broader Stoxx Europe 600 Index, which ended down 0.7 percent on Wednesday, was up 1.15 percent.
This is a low volume rally, said Manoj Ladwa, a senior trader at ETX Capital.
Global stocks, as measured by MSCI world equity index <.MIWD00000PUS> were edged up 0.2 percent though still on track for a fall of about 12 percent in 2011.
Investors are winding down for year-end and trading volumes are set to dwindle but the threat of mass credit ratings downgrades for the euro zone countries is still hanging over the market.
ITALIAN CONFIDENCE VOTE
In debt markets attention was focused on Italy where a vote of confidence is due in the upper house on Prime Minister Mario Monti's government to seal approval of a 33-billion euro ($43 billion) austerity package.
The package passed in the lower house last week and is expected to succeed just as easily in the upper house. Were Monti to lose the vote, his government would collapse.
Italian 10-year bond yields were 4.5 basis points lower at 6.77 percent after the ECB was forced to step back into the secondary market on Wednesday as yields jumped higher in the wake of the ECB's three-year tender.
Equivalent Spanish paper was yielding 5.32 percent, little changed on the day.
The euro zone debt markets are expected to come under fresh pressure with some 230 billion euros of bank bonds, up to 300 billion in government bonds, and more than 200 billion euros in collateralized debt all maturing in the first quarter of 2012.
Commodities markets were muted in thinning pre-holiday trade, with London Metal Exchange copper up slightly at $7,478.25 a metric ton and Brent crude oil little changed at around $107.70 a barrel.
(Additional reporting by Nia Williams; Editing by Toby Chopra)