* FTSEurofirst 300 up 2.1 pct to 20-month high
* U.S. budget deal allays recession risk, but new jitters
* Euro STOXX 50 "overbought" as it rises 2.9 pct
By Francesco Canepa
LONDON, Jan 2 (Reuters) - A last-minute U.S. budget deal
sent European shares to 20-month highs on Wednesday, pushing
some regional indexes into "overbought" territory and leaving
them vulnerable to a pullback.
The agreement to avert steep austerity measures in the
world's largest economy triggered a rally in assets that depend
on economic strength, such as equities, but the deal was only a
partial fix to the country's budget woes.
The pan-European FTSEurofirst 300 index closed 2.1
percent higher at 1,157.40 points in the first trading session
of the year, led by shares in the cyclical basic resources
The Euro STOXX 50 rose 2.9 percent to 2,711.25 while the
Euro STOXX 50 Volatility Index, which measures option
prices on euro zone blue chips and is regarded as a measure of
stock market risk aversion, dropped 14 percent.
Further U.S. political showdowns are expected over the next
two months, however, all of which could dent investor sentiment
and result in increased share price volatility.
"We'll see a few more days of euphoria but then the reality
will set in," said Mike Turner, head of global strategy and
asset allocation at Aberdeen Asset Management, adding he would
sell futures contracts on major indexes at the first sign of
fresh political jitters.
The STOXX Europe 600 index, the euro zone Euro
STOXX 50 and Germany's Dax moved into
"overbought" territory on their 20-day Relative Strength Index,
a momentum indicator, meaning that some short-term sellers may
start to take profit on the indexes in the coming days.
Charts on the STOXX 600 also showed the pan-European gauge
closed at a resistance level, 285, that capped the index twice
in May 2011.
"If you're long, you should stay long and set a stop loss,
but if you're not long it's pretty dangerous to buy now,"
Valerie Gastaldy, the head of Paris-based technical analysis
firm Day-By-Day, said.
"If we consolidate now it will not be a very steep fall, but
if we get to (the 2011 peak at) 292, that will be really
She recommended setting a stop loss at 281, the higher end
of a gap between Wednesday's open and the previous session's
Traders also said Wednesday's gains had to be taken with a
pinch of salt because the first trading day of each year tends
to produce share price rises as new money is put to work.
London's FTSE 100, up 2.2 percent on Wednesday,
averaged a rise of around 1.2 percent on the first trading days
of the last 12 years, according to Thomson Reuters data.
The new money was also visible in a pick-up in trading
volume, which was broadly in line with the 90-day average on all
major indexes after wafer-thin activity during the Christmas
The STOXX 600 rose 14.4 percent last year, outperforming its
U.S. peer, the Standard & Poor's 500, as sentiment
surrounding Europe improved thanks to bold promises by the
European Central Bank to defend the shared currency.
U.S. funds invested in European shares raked in a net $5
billion in 2012, reversing sharp outflows since the start of the
euro zone debt crisis, Lipper data showed.