European shares rally on German growth hopes

Fri Jan 25, 2013 7:31am EST

* Euro STOXX 50 up 0.7 pct, FTSEurofirst 300 up 0.2 pct
    * Strong Ifo survey boosts growth expectations
    * Germany's DAX hits 5-year high
    * Euro zone banks rally on ECB loan repayment plans
    * Nokia down 5.4 pct on cash concerns

    By Francesco Canepa
    LONDON, Jan 25 (Reuters) - European shares rallied on Friday
as strong economic data out of Germany boosted expectations
Europe's largest economy can help drag the region out of crisis.
    A surprisingly strong Ifo business climate index for January
built on a run of solid German data, including the purchasing
manager index on Thursday.
    It helped Frankfurt's Dax index rise 1.1 percent to
a five-year high while, by 1204 GMT, the euro zone's Euro STOXX
50 index stood up 0.7 percent at 2,740.93.
    The Euro STOXX 50 has risen 27.7 percent since late July,
boosted by a pledge by the European Central Bank to help the
region's weaker economies, outpacing a 12.3 percent rise for the
U.S S&P 500 index.
    "The strong momentum in euro zone activity is supportive of
further (equity market) outperformance of Europe versus the
U.S.," said Emmanuel Cau, a strategist at JPMorgan, while adding
he thought the bulk of the rally in Europe was over.
     In a further signal of growing appetite for European
equities, the Euro STOXX 50 Volatility Index, the
region's widely-used measure of investor risk aversion, hit a
near six-year low on Friday.
    Charts on the Euro STOXX 50 confirmed a bullish short-term
outlook as long as the index remained above 2,692 - a low hit on
Thursday that also roughly corresponded to the index's rising
20-day simple moving average. 
    "As long as 2,692 is support, a test of the resistance level
at 2,790 remains the most likely scenario," Nicolas Suiffet, a
an analyst at Paris-based Trading Central said, setting his
target at the 'neckline' of a chartist pattern known as a double
top, validated in May 2011.
    "Alternatively, a break below 2,692 would not invalidate the
short-term bullish trend but would open the way to a correction
move towards 2,600 (a recent strong resistance) and 2,546 (the
low end of a gap opened in November."
   
    
    CONSOLIDATION
    JPMorgan's Cau argued the bulk of the European rally was
over, with the pan-European MSCI Europe index trading
at 11.8 times its earnings for the next 12 months, only 2
percent away from its median of the last 10 years. 
    Earnings momentum remained negative and U.S. data started to
disappoint, as shown by the Citigroup U.S. Economic Surprise
indicator turning negative this week.
    "On most occasions when (the indicator) turned negative,
cyclical (stocks) underperformed defensives over the following
few months," Cau said.
    He still saw value in financial shares, which benefit from
the financial stability brought by ECB's pledge, and said there
was scope for a further 10 percent rally in European banks if
their share prices matched the recent fall in their bond yields
and other debt instruments.
    The positive effect of the ECB's moves were visible on
Friday as euro zone banks said they will repay 137 billion euros
worth of cheap ECB loans next week, opting to hand back the
money early in a sign at least parts of the financial system are
returning to health. 
    The figure was higher than expected and helped the Euro
STOXX banking index extend gains to around 1 percent.
    The FTSEurofirst 300 index of pan-European shares
was up 0.2 percent at 1,173.53 points, having trimmed gains
after data showed a bigger than expected contraction in the
British economy.
    Curbing gains on the index was Finnish handset maker Nokia
, which fell sharply for the second day in a row, with
traders citing the impact of a UBS price target cut on the stock
and ongoing concerns over Nokia's cash position.
    Also weighing on the handset maker are outlook comments from
market leader Samsung Electronics, which said it
expects the global smartphone market to shrink in the first
quarter from the seasonally strong fourth quarter.
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