CORRECTED – Europe stocks resume rally as debt jitters abate

(Corrects last paragraph to say Swiss Life shares were up, not
down)

* FTSEurofirst 300 rises 0.5 pct, up 8 pct since mid-March

* Increasing correlation between Euro STOXX 50 and euro

* Stocks seen getting ‘overbought’ after strong rally

* For up-to-the-minute market news, click on [STXNEWS/EU]

By Blaise Robinson

PARIS, April 8 (Reuters) – European stocks rose in early
trade on Friday, resuming a brisk three-week rally after the
European Central Bank’s decision to raise interest rates helped
fuel optimism over the health of the euro zone economy.

Investors were also relieved a strong aftershock which
struck Japan’s earthquake-ravaged northeast late on Thursday had
not done major damage. News of the earthquake had sparked profit
taking in late trading in Europe on Thursday.

At 0833 GMT, the FTSEurofirst 300 index of top European
shares was up 0.5 percent at 1,149.98 points.

“The ECB’s move is sort of removing the punch bowl, which is
a good thing at this point. The message is that overall, the
European economy has been improving,” a Paris-based trader said.

As expected, the European Central Bank raised interest rates
for the first time since the 2008 financial crisis on Thursday,
and market expectations of more hikes this year sent the euro to
a 15-month high against the dollar, boosting foreign investors’
appetite for the region’s stocks as they seek exposure to the
rallying currency.

The 30-day rolling correlation between the euro (EUR=: Quote, Profile, Research) and
the euro zone’s blue chip Euro STOXX 50 (.STOXX50E: Quote, Profile, Research) index has
been increasing since mid-March, hitting 0.37 on Friday.

Portuguese stocks extended their relief rally while euro
zone finance ministers were set to discuss the country’s bailout
plea on Friday, including how much it needs and what reforms it
could do in return. [ID:nLDE7362AR]

Portugal’s PSI 20 index (.PSI20: Quote, Profile, Research) gained 1.1 percent, with
Banco Espirito Santo (BES.LS: Quote, Profile, Research) up 1.7 percent and Banco BPI
(BBPI.LS: Quote, Profile, Research) up 1.3 percent.

The Peripheral Eurozone Countries Index (.TRXFLDPIPU: Quote, Profile, Research) rose
1.6 percent, while the Euro STOXX 50 volatility index (.V2TX: Quote, Profile, Research),
one of Europe’s main barometers of investor anxiety, dropped 4.5
percent to 20.1 points, signalling a drop in fears of contagion
from Portugal debt woes to other European countries.

Mining shares such as Xstrata and Anglo American featured
among the top gainers, rising along with buoyant metal prices,
while Total (TOTF.PA: Quote, Profile, Research), BP (BP.L: Quote, Profile, Research) and Royal Dutch Shell (RDSa.L: Quote, Profile, Research)
added 0.4-1 percent as Brent crude (LCOc1: Quote, Profile, Research) rose $1 to a fresh
32-month high on supply cuts in Libya.

The FTSEurofirst 300 index has risen about 8 percent over
the past three weeks, pushing the index close to ‘overbought’
territory, with its relative strength index (RSI) at 59 on
Friday — 70 and above is considered ‘overbought territory’ —
while its slow stochastic, an indicator of short-term trends,
showed the index was ripe for a pull-back.
Derek Lawless, head of WorldSpread France, said a 3 to 4
percent retreat wouldn’t come as a surprise.

“People have taken their eyes off Brent prices, which trade
at $124; the Bank of France just trimmed its first-quarter
growth forecast, which is never a good sign, and down the road,
consumers in peripheral European countries will definitely
suffer from the monetary tightening,” he said.

In a note to clients, UniCredit recommended investors to
take long positions on European insurance stocks (.SXIP: Quote, Profile, Research) and
short retailers’ stocks (.SXRP: Quote, Profile, Research) as the ECB’s rate rises will be
supportive to the insurance sector while crimping consumer
spending.

Insurance stocks were among the top gainers on Friday, with
AXA (AXAF.PA: Quote, Profile, Research) up 1.5 percent, and Swiss Life (SLHN.VX: Quote, Profile, Research) up 2.2
percent.
(Reporting by Blaise Robinson, additional reporting by Dominic
Lau in London; Editing by Jon Loades-Carter)

CORRECTED – Europe stocks resume rally as debt jitters abate