Economy optimism lift European shares to 3-week high

By Harpreet Bhal

LONDON (Reuters) – European shares hit a three-week closing high Wednesday after a U.S. labor report revived confidence in a recovery in the world’s largest economy.

The ADP employment report showed an addition of 201,000 private sector jobs in March, giving investors hope for a similarly upbeat reading for Friday’s government-compiled non-farm payrolls data, which analysts said could help lift equities from their recent ranges.

The pan-European FTSEurofirst 300 index of top shares ended up 0.8 percent at 1,134.63 points, its highest closing level since March 9.

Heavyweight mining shares were among the big gainers, supported by confidence in the recovery of the economy. The STOXX Europe 600 basic resources index rose 0.8 percent

Within the sector, Vedanta rose 3.4 percent as traders cited a bullish note from Morgan Stanley in which the broker said the market had not recognized the miner’s industry-leading growth.

Carmakers were also buoyed by improved economic prospects, with the STOXX Europe 600 autos index up 1.7 percent, bouncing back from falls triggered by concerns about disruption to global supply chains in the aftermath of the earthquake and tsunami in Japan.

Defense firm Rolls Royce added 1.7 percent after broker HSBC upgraded its investment recommendation and lifted its earnings forecast.

Technical indicators also showed the market had scope to push higher before being reaching the 70 overbought level, with the 14-day relative strength index (RSI) on the Euro STOXX 50

hitting 53 Wednesday, easing from oversold territory of below 30 earlier in March.

“We have worked through the oversold conditions, and technically the markets are in a very strong and favorable condition to respond to good newsflow. If we do get good non-farm payrolls, the market will do very, very well,” said Mike Lenhoff, chief strategist at Brewin Dolphin.

“The time has come for some positive surprises on the non-farm payrolls because business confidence is very high, and the employment component of the ISM surveys indicate that companies are predisposed to creating jobs.”

A revival of the U.S. labor market and an easing of the high unemployment rate are seen as crucial elements in the path to economic recovery, with non-farm payrolls expected to show the economy created 190,000 jobs in March, while the private payrolls component is forecast to rise by 200,000.

DOWNSIDE

On the downside, hearing aid maker Sonova fell 11.7 percent after its chairman, chief executive and chief financial officer resigned following an insider trading probe.

Bancassurer Irish Life & Permanent suspended trading of its shares in London and Dublin after media reports that bank stress tests might force it into state control. Bank of Ireland fell 9.3 percent.

Ireland is scheduled to release results of its latest stress tests Thursday at 1530 GMT, hoping that the results will put a final figure on the cost of dealing with its banking crisis.

“Tomorrow’s Irish bank stress tests are expected to see a further drain in the bailout contingency fund, and this will in all likelihood lead to another ratings downgrade,” said Michael Hewson, market analyst at CMC Markets.

Other fallers included Dixons, which shed 18.3 percent after its profit warning and downbeat forecast added to the view that cash-strapped shoppers were cutting back on spending.

Dixon’s troubles had a read-across to fellow retailer Marks and Spencer, which fell 3 percent, on fears the firm could release a gloomy outlook in its fourth-quarter update due next week.

(Reporting by Harpreet Bhal; Editing by Will Waterman)

Economy optimism lift European shares to 3-week high