European Shares Stay Upbeat on EU Deal Euphoria

European shares extended the previous session's rally Friday, with investors still buoyant over a deal struck by euro zone leaders early Thursday to help end the bloc's two-year-old debt crisis.

Solid third-quarter sales from French car maker Renault (RENA.PA) also lifted the auto sector .SXAP and the broader index. Renault climbed 5.8 percent and the sector gained 1.2 percent.

Banking shares .SX7P, which have been battered by fears of potential heavy losses from a possible Greek default, advanced 1.8 percent, extending their 8.9 percent surge Thursday. However, they remain down 23 percent this year.

French banks, among the worst hit because of their significant exposure to highly indebted euro zone countries, were among the top performers, with BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA) up 3.4 to 4.7 percent.

Edmund Shing, equity strategist at Barclays Capital, said equities were likely to recover further next week ahead of the G20 summit on November 3 and 4 as investors would not want to bet against policymakers for now, even though there were a lot of details to be worked out. At the same time, he advised investors not to chase the market too aggressively.

The next key event is just in one week's time. Up until then, equities can probably make up further ground, Shing said.

However, clearly at that point we need to see some newsflow, for instance, how the IMF can contribute to the EU bailout fund and more importantly how emerging market nations like China and Brazil can contribute to that.

The BarCap strategist added the euro zone debt crisis deal, nevertheless, had removed some of the uncertainties, which may stabilize or even boost business confidence in Europe, leading to outperformance in cyclicals, such as industrials, and midcaps.

The STOXX Europe 600 industrial goods & services index .SXNP, with a 12-month forward price-to-earnings ratio of 10.8, looked more expensive than the broader STOXX Europe 600 .STOXX, which had a one-year forward P/E of 9.2, data from Thomson Reuters Datastream showed.

By 0840 GMT (4:04 a.m. EDT), the FTSEurofirst 300 finance/markets/index?symbol=gb%21FTPP>.FTEU3 index of leading European shares was up 0.5 percent at 1,024.97 points to reach a fresh three-month high. The benchmark is up 11 percent so far this month and is on track for its biggest monthly rise since April 2009, though it is still down 8.6 percent for the year.

European equities have been on the ascendant after hitting a trough in early October, lifted by high hopes that euro zone policymakers would finally take the much needed steps to tackle the sovereign debt problems.

Technical charts showed some of the major European indexes, such as Britain's FTSE 100 .FTSE and Germany's DAX .GDAXI, could be ripe for a correction, with their 14-day relative strength index approaching overbought territory.

The FTSE 100 and DAX were also touching the upper band of the momentum indicator Bollinger Bands, signaling the indexes could pull back in the short-term.

The UK blue-chip index added 0.2 percent and the DAX put on 1 percent, while Italy's FTSE MIB .FTMIB was down 0.2 percent, underperforming the broader market with Banco Popolare Milano (PMII.MI) falling 7 percent after pricing a 800 million euros capital increase.

The complete lack of details out of the European summit doesn't give investors a great sense of comfort, said Fredrik Nerbrand, global head of asset allocation at HSBC. I find it curious and if anything but rather worrying that Italian bond yields are up to the level as they were before the summit, while the equity markets are completely decoupled from that.

Nerbrand said they were still conservative in how they assess risk in a slow economic growth environment, though they favored credits over equities at the moment.