European stock markets rallied on Friday after European Union leaders working overnight knocked out an agreement on refugees, a deal seen as removing political risk that had been hanging over equities.

What are markets doing?

The Stoxx Europe 600 index SXXP, +1.07% climbed 1.2% to 381.35, trimming its weekly loss to 1%. On Thursday, it fell 0.8% as traders were niggled by lingering worries over trade tensions.

The first half of 2018 wraps up after Friday’s closing bell, and the pan-European benchmark is on track for a 2% loss for the period. For the second quarter, the Stoxx 600 is looking at a 2.8% gain, rebounding from a 4.7% loss in the first three months of the year.

Germany’s DAX 30 index DAX, +1.44% was up 1.5% at 12,358.96 on Friday, but heading for a 1.8% weekly loss and 4.3% first-half slide.

France’s CAC 40 index PX1, +1.29% rallied 1.4% to 5,348.04, turning positive for the year, but on track for a 0.8% weekly decline.

The U.K.’s FTSE 100 index UKX, +0.74% gained 1.1% to 7,699.32. The advance helped set the London benchmark on track for a 0.2% weekly gain and a 0.1% first-half rise.

European stocks performance Index Weekly Quarter First half Stoxx 600 -1% +2.8% -2% DAX 30 -1.8% +2.2% -4.3% CAC 40 -0.7% +3.5% +0.7% FTSE 100 +0.2% +9.1% +0.2%

The euro EURUSD, +0.6656% jumped to $1.1625 from $1.1569 late Thursday in New York. The pound GBPUSD, +0.5964% rose to $1.3112 from $1.3078 on Thursday.

What is driving the market?

Investors were breathing a sigh of relief Friday after EU leaders at a summit in Brussels early in the morning agreed on a deal to tackle the divisive issue of migrants. The countries agreed to set up new “controlled centers” for asylum seekers and redistribute the migrants across the entire union on a voluntary basis. The leaders also agreed to strengthen control of the EU’s external borders.

The deal is seen as taking pressure off German Chancellor Angela Merkel, who was being pressed by the key partner in her coalition government to come back from Brussels with a plan to stem migration.

Analysts feared a failure to reach an agreement would bring Merkel’s fragile coalition under so much pressure that new elections would be needed in Germany, the EU’s largest economy.

With the migration issue out of the way for now, attention for the second day of the EU summit is likely to fall on Brexit. The U.K. and the rest of the EU still appear divided on key parts of the post-divorce deal, so analysts are not expecting any major Brexit breakthrough at the meeting.

Check out: Brexit anniversary shows why panic selling is a loser’s move, says Mark Hulbert

And see: 2 years after Brexit vote, these charts show the U.K. economy losing momentum

What are strategists saying?

“We believe a de-escalation of the German government crisis is the base case but, looking ahead, we should not underestimate the risk of a breaking apart of the German government and toppling of Merkel over coming months,” analysts at Danske Bank said in a note.

“Should she be replaced by a more hard-line/conservative candidate, it could have grave repercussions for the stability and resilience of the EU and bring the European political risk premium back to markets,” they added.

Stock movers

Novartis AG NOVN, +3.20% NVS, +0.77% climbed 3.5% after the Swiss drug giant said it will buy back up to $5 billion worth of its own shares and plans to spin off its Alcon eye-care business.

Shares of Deutsche Bank AG DBK, +2.56% DB, +0.87% gained 3.8%, even after the U.S. Federal Reserve rejected the capital plan of the U.S. arm of the German lender in the Fed’s annual stress test.

CaixaBank SA CABK, +4.88% rallied 5.6% after the Spanish bank late Thursday said it will sell most of its real-estate business to a company owned by Lone Star funds.

Economic news

Data out of Germany showed the country’s labor market remained strong in June, with jobless claims dropping by 15,000 and the unemployment rate remaining at 5.2%, an all-time low.

Inflation data from the eurozone showed consumer prices rose 2% in June, up from 1.9% in May. That means headline inflation now is around the European Central Bank’s target of close to, but below 2%. However, core inflation — which excludes the volatile items of energy, food, tobacco and alcohol — fell to 1% from 1.1% in May.

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