European stocks tick higher; chemical shares support

* FTSEurofirst 300 up 0.04 percent to 3-week closing high

* Merger news, global economic outlook support market

* Rhodia shares up 48 percent after Solvay launches bid

By Atul Prakash

LONDON, April 4 (Reuters) – European equities edged up to a
three-week closing high on Monday supported by merger news, with
Rhodia (RHA.PA: Quote, Profile, Research) leading chemical stocks after Solvay’s (SOLB.BR: Quote, Profile, Research)
3.4 billion euro ($4.8 billion) bid.

Signs of an improving economic outlook also helped the
FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index of top European shares end 0.04
percent firmer at 1,141.86 points, the highest close since March
9, albeit with volumes at 82 percent of the 90-day average.

Headwinds such as Japan’s nuclear problem, unrest in the
Arab world and the euro zone’s debt crisis were in the
background as investors focused on issues such as a likely rate
hike by the European Central bank on Thursday and an improvement
in the U.S. labour market reported last Friday.

“Positive sentiment is coming from mergers. We will see more
mergers and acquisitions and it is one of the reasons why the
stock market is still trading at these higher levels,” a
London-based equity trader said.

“Some long-only institutions are going underweight retailers
as some stores have been complaining about dwindling sales. I
would imagine people will continue to be underweight the sector.
We have seen some good buying in construction stocks.”

Chemical shares featured among the top gainers, with the
STOXX Europe 600 chemical index (.SX4P: Quote, Profile, Research) rising 1.2 percent.
Rhodia jumped 48 percent after Solvay launched a bid.

In other M&A news, Vodafone (VOD.L: Quote, Profile, Research) sold its 44 percent
stake in French mobile operator SFR to Vivendi (VIV.PA: Quote, Profile, Research) for 7.95
billion euros. Vodafone ended 0.1 percent lower while the sector
index (.SXKP: Quote, Profile, Research) rose 0.3 percent.

“M&A and fund flows into equity markets are providing
support to the asset class,” said Graham Secker, European equity
strategist at Morgan Stanley.

Analysts said equities remained attractive on valuation
grounds and by comparison with other asset classes. Europe’s
STOXX 600 index (.STOXX: Quote, Profile, Research) carries a forward price-to-earnings
(P/E) ratio of 10.5, below its 10-year average of 13.6.

FINANCIALS SUFFER

Financials topped the fallers’ list, with the STOXX Europe
banking index (.SX7P: Quote, Profile, Research) down 0.7 percent and the insurance sector
index (.SXIP: Quote, Profile, Research) falling 1.1 percent, on persistent concerns about
the euro zone debt situation.

Morgan Stanley said investors were positive on European
banks, but three factors were holding them back: funding; a need
for more clarity on capital and funding rules; and greater
policy support to peripheral countries. [ID:nLDE7331J1]

Investors waited for this week’s rate decision by the
European Central Bank (ECB). A rate hike of 25 basis points from
a record low in reaction to rising inflationary pressures was
already priced in, analysts said. (ECBWATCH: Quote, Profile, Research)

“To me it is not a negative. The ECB is ready to hike rates,
which is also a vote of confidence in the strength of the
upswing. In terms of the macroeconomic impact, a 25 basis point
hike is really marginal,” said Klaus Wiener, chief economist at
Generali Investments, which manages $465 billion.

“There is a risk to the oil price, there is Japan, but in
the end what matters is the strength of the global upswing and
all these risk factors will not derail it.”

J.P.Morgan Cazenove saw technology shares leveraged to
economic upswing and said they remained attractively priced. It
was particularly bullish on semiconductors and software
companies, and was underweight on defensives such as
pharmaceuticals.
(Additional reporting by Brian Gorman in London and Blaise
Robinson in Paris; Editing by Dan Lalor)
($1 = 0.7031 euro)

European stocks tick higher; chemical shares support