Europe Experiences Euro-phoria

The switchover to the single currency comes off without a major hitch.
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FRANKFURT -- Euro-phoria swept across Continental Europe today, which combined with high levels of liquidity, ignited an explosive rally.

The new single currency became a reality Jan. 1 for 11 of the 15 EU nations, but today was the first trading day for the euro and euro-denominated stocks and bonds. Investors thus far are giving the euro the big thumbs up, ignoring a 3.1% skid in Tokyo stocks and a 2.4% fall in Hong Kong.

The euro was last bid at 1.1798 dollar, up from the reference rate of 1.16675 set Dec. 31 by EU finance officials. Bond prices now denominated in euros also got a huge boost, with German 10-year bond yields dropping nearly 10 basis points.

The massive effort to prepare for the euro switchover appeared to have paid off, with no major problems reported.

In addition to the good mood created by the launch of the euro, stocks also were boosted by institutional buying. Many institutions quit trading in mid-December to switch over their books to the euro and start the new year with piles of cash, which now need to be put to work.

In Frankfurt, the

DAX

in Xetra trading was up 181 points, or 3.6%, at 5188, and in Paris the

CAC-40

was up 144, or 3.7%, at 4087. Most other Continental European bourses were up from 2% to 4%.

London was the exception, with the

FTSE-100

down 11 points, or 0.2%, at 5871. The U.K. is one of four EU nations not participating in the single currency. There is also concern that the U.K. might be slipping into recession.

Despite the huge gains in the eurozone, volumes were only light to moderate, reflecting an underlying caution. Investors here want to see whether Wall Street starts the New Year in a buying mood.

S&P 500

futures were last up 3.50 points at 1249.00, having rebounded from the overnight session low of 1238.80.

Andreas Kehl, equity sales trader at

Deutsche Bank

in Frankfurt, says the market had a buoyant feel to it despite the moderate volumes. "I think we have got some market momentum."

Many sectors in the eurozone were posting mouth-watering gains. But banks and financial names, which are expected to benefit strongly from a single currency, were among the biggest winners.

Deutsche Bank

was up 4.3%, German mega insurer

Allianz

, up 7.2%, and

Societe Generale

, up 5.7%.

Nonbank standouts included

DaimlerChrysler

, up 4.4%,

Deutsche Telekom

, up 7.8%, and

Ericsson

, up 4.7%.

In London,

BP Amoco

, the oil giant created by the merger of

British Petroleum

and Amoco jumped 5.2% in its first day of trading. Volume was extremely high.

But

Imperial Chemical Industries

slid 4.2% on news that a deal had fallen through to sell its toxic operations to

DuPont and

NL Industries

for $1 billion.

Gary Dugan, a European equities strategist at

J.P. Morgan

in London with a bearish bent, remains unswayed by the rally on the Continent. "I think the U.K. market today is a better reflection of fundamentals."

Those fundamentals include slowing European economic growth, a cloudy company profits outlook and expectations for dollar weakness against the euro, which would cut into the profits of European exporters. He also thinks Brazil is a ticking financial time bomb.

"We still believe there are some problems out there," he says.