European shares rise, M&A sustains 3-week rally

* FTSEurofirst 300 up 0.2 pct, up 7 pct in three weeks

* Rhodia jumps 49 pct after Solvay bid

* ECB rate hike seen as supportive for European stocks

* Time to buy volatility derivatives, Nomura says

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

By Blaise Robinson

PARIS, April 4 (Reuters) – European stocks rose in early
trade on Monday as merger activity kept the market’s three-week
rally going ahead of an expected interest rate rise by the
European Central Bank seen as supportive for European equities.

Shares in chemical group Rhodia (RHA.PA: Quote, Profile, Research) jumped 50 percent
after Solvay (SOLB.BR: Quote, Profile, Research) launched a 3.4 billion euro agreed bid
for its French rival, while Vodafone (VOD.L: Quote, Profile, Research) also rose after
selling its 44 percent stake in France’s second-biggest mobile
telecoms operator SFR to Vivendi (VIV.PA: Quote, Profile, Research) for a total of 7.95
billion euros ($11.3 billion).

Solvay (SOLB.BR: Quote, Profile, Research) was up 3.1 percent while Vivendi (VIV.PA: Quote, Profile, Research)
gained 0.4 percent.

“The newsflow coming from the M&A front is very welcome.
We’ve been expecting it for a while, so it’s a very good start
for the quarter,” said David Thebault, head of quantitative
sales trading, at Global Equities in Paris.

On Friday Nasdaq OMX (NDAQ.O: Quote, Profile, Research) and Intercontinental Exchange
(ICE.N: Quote, Profile, Research) launched a counter bid to buy NYSE Euronext (NYX.N: Quote, Profile, Research)
(NYX.PA: Quote, Profile, Research), trumping an initial bid from Germany’s Deutsche Boerse
(DB1Gn.DE: Quote, Profile, Research).
At 0855 GMT, the FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index of top
European shares was up 0.2 percent at 1,143.91 points, after
gaining 1.5 percent on Friday.

The benchmark index has risen about 7 percent since reaching
a floor in mid-March, but it is still down 4 percent from a peak
touched in mid-February.

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Interactive graphic on M&A: http://r.reuters.com/kyb46q

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Heavyweight mining shares gained ground, with Xstrata
(XTA.L: Quote, Profile, Research) up 0.9 percent, rising along with metal prices.

Around Europe, UK’s FTSE 100 index (.FTSE: Quote, Profile, Research) was up 0.2
percent, Germany’s DAX index (.GDAXI: Quote, Profile, Research) up 0.2 percent, and
France’s CAC 40 (.FCHI: Quote, Profile, Research) up 0.05 percent.

Later in the week, investors will turn their focus on the
ECB’s decision on interest rates, due on Thursday.

Societe Generale strategists see the expected rate hike as
supportive for European equities, as it should boost the euro
currency and tame inflation fears.

“The euro strengthening versus the U.S. dollar should lead
to a re-rating of European equities. Cheap valuation should
allow European equities to absorb higher European bond yields,”
Societe Generale’s strategists wrote in a note.

Despite the brisk three-week rally, European stock valuation
levels remain comparatively low. Europe’s broad STOXX 600 index
(.STOXX: Quote, Profile, Research) carries a forward price-to-earnings (P/E) ratio of
10.5, well below its 10-year average of 13.6.

Investors seeking protection for their equity portfolios
should start buying volatility derivatives again as the main
volatility indexes (.V1XI: Quote, Profile, Research) (.V2TX: Quote, Profile, Research) (.VIX: Quote, Profile, Research) fall back toward their
long-term averages following a recent spike triggered by
violence in Libya and Japan’s nuclear crisis, said Frederic
Cezard, executive director at Nomura in Paris.

“We’re back to good entry levels. The market is getting used
to the negative newsflow coming from the Fukushima nuclear plant
… At these levels we see the return of inflows into volatility
derivatives,” he said.

Volatility indexes won’t fall much further as a number of
worries, from unrest in the Arab world to the euro zone debt
crisis, will continue to rattle investors and could spark sudden
surges in volatility, Cezard warned.

Volatility derivatives are used by equity fund managers as a
protection against market corrections because of their strong
negative correlation with stocks.
($1=.7031 euros)
(Editing by Greg Mahlich)

European shares rise, M&A sustains 3-week rally