European stocks tick higher

By Atul Prakash

LONDON (Reuters) – European equities edged up to a three-week closing high on Monday supported by merger news, with Rhodia leading chemical stocks after Solvay’s 3.4 billion euro ($4.8 billion) bid.

Signs of an improving economic outlook also helped the FTSEurofirst 300 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. labor 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 rising 1.2 percent. Rhodia jumped 48 percent after Solvay launched a bid.

In other M&A news, Vodafone sold its 44 percent stake in French mobile operator SFR to Vivendi for 7.95 billion euros. Vodafone ended 0.1 percent lower while the sector index 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 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 down 0.7 percent and the insurance sector index

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.

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.

“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