European share gains arrested by ECB rate fears

By Harpreet Bhal

LONDON (Reuters) – Expectations that euro zone interest rates could rise earlier than forecast rattled equity investors on Thursday, with shares in peripheral euro zone states hit hardest on concerns that higher lending rates would hit the fragile recovery.

However, the wider equity market got support from confidence in the strength of the labor market after data showed weekly jobless claims dropped to a 2-1/2 year low, setting a positive tone ahead of Friday’s keenly-watched non farm payrolls report.

A pull-back in crude oil prices from recent highs also reassured investors, after Venezuela said the Libyan government has accepted a proposal for an international commission to seek a negotiated solution to its crisis.

The pan-European FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) share index closed 0.2 percent higher at 1,155.94 points, but dropped from earlier highs of 1,166.01 points after hawkish comments from the European Central Bank (ECB) following its monthly meeting.

ECB President Jean-Claude Trichet said the central bank would exercise “strong vigilance” over rising inflation, adding that an increase in interest rates in the next meeting was possible.

“The market’s expectation of interest rates is going to determine how equities perform in the next few quarters,” said Joshua Raymond, market strategist at City Index.

“It’s something that traders are going to have to think about earlier this year than they would have expected.”

SPANISH STOCKS PRESSURED

Spain’s IBEX (.IBEX: Quote, Profile, Research) index was the biggest faller among its peripheral peers, down 0.7 percent as concerns grew over the implications of higher interest rates on the highly indebted country.

Spanish lenders were on the back foot, with Banco Santander (SAN.MC: Quote, Profile, Research) off 1.7 percent.

Conversely, the London market’s FTSE 100 (.FTSE: Quote, Profile, Research) index jumped 1.5 percent, underpinned by strength in heavyweight mining firms as the sector recouped losses from earlier in the week on reduced worries that higher energy prices would hamper economic recovery.

Technical analysts said the medium-term outlook for European shares was still bullish and saw more gains on the horizon for the euro zone’s blue chip Euro STOXX 50 index (.STOXX50E: Quote, Profile, Research), which rose 0.4 percent to 2,969.24 points on Thursday.

“As long as prices are managing to stay above this 50-day moving average line at 2,942 today, and the low-end of the trend channel at 2,920, I consider this as a consolidation within the up-trend from its November lows,” said Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking.

“This should be followed by the next rally phase indefinitely breaking at the 3,045 resistance barrier confirming the bullish undertone in the markets.”

Gains in technology shares helped the market push higher, with Alcatel-Lucent (ALUA.PA: Quote, Profile, Research) rising 6.4 percent, as traders cited market talk of a potential takeover bid from a Chinese company.

Brokers were also bullish on the stock.

“We continue to see Alcatel-Lucent as the best positioned of a challenged group of companies in the telecoms infrastructure segment and raise our estimates again,” Barclays analysts said in a note.

(Graphics by Scott Barber; Editing by Greg Mahlich)