2:35 PM Frankfurt – European markets staged a rally after leaders agreed to use rescue funds to lend directly to banks and approved €120 billion stimulus program. Anheuser Busch InBev agreed to buy remaining stake in Mexico-based Modelo for $20 billion.

European leaders agreed to offer direct support to struggling banks in the region using two rescue funds but on the condition of establishing a regional supervision authority.

The leaders relaxed the earlier stance demanding greater austerity from the governments and closer scrutinies from various regional agencies before agreeing to offer direct lending to banks as long as countries comply with EU budget rules.

The move released tension temporarily in the bond market and also relived the pressure on the euro but also spread the risk across all members to support the struggling banks of Spain and the potential bailout of Italian banks later in the years.

The leaders under intense pressure from markets to deliver specific steps also agreed on a stimulus program of €130 billion that was previously agreed by four largest nations in the euro zone.

The decisions were announced by the European Council president Herman Van Rompuy after working through long hours well into the late night.

Financial markets welcomed the agreement and benchmark indexes soared more than 1.6% in the region. The direct lending from the rescue funds to banks will help Spain and potentially Italy to support its banking system without increasing nations’ debt.

Bond yields of Spain and Italy edged lower after the agreement but past market rallies have been brief and often followed by creeping skepticism.

Euro area inflation remained unchanged in June and German retail sales fell in May.

In Paris trading, the CAC-40 Index surged 63.25 or 2.1% to 3,114.93 and in Frankfurt the DAX Index edged higher 126.54 or 2.1% to 6,276.38.

For the week, the CAC-40 Index rose 0.8% and the DAX Index surged 2.2%.

The yield on Spain’s benchmark 10-year bonds dropped 36 basis points to 6.58%. Italian 10-year yields declined 25 basis points to 5.94%.

Euro-zone Inflation Stable

Euro-zone annual inflation remained unchanged at 2.4% in June, flash estimate issued by Eurostat showed today.

Inflation continued to stay above the European Central Bank's 'below, but close to 2 percent' target.

Separately, euro-zone's broad monetary aggregate M3 rose 2.9% from a year ago in May following a 2.5% rise in April, the European Central Bank said.

German Retail Sales Fall

German retail sales fell 0.3% on a monthly basis in May following a 0.2% drop in April, the latest data from the Federal Statistics Office showed today.

This was the second consecutive monthly decline and annually sales dipped 1.1% in May. Food, beverages and tobacco product sales in May climbed 0.1% and non-food sales fell 1.7% from May 2011.

French GDP Flat