European shares rally, Tullow Oil buoyed by oil find
* FTSEurofirst 300 up 0.5 pct
* European stock 'fear gauge' drops
* Tullow Oil boosted by oil find
By Tricia Wright
LONDON, Nov 22 (Reuters) - European shares advanced on Friday as overnight rallies in the United States and Japan signalled growing investor appetite for risk. Tullow Oil helped lead the gains after it reported finding oil in Kenya.
Shares have been trading in a narrow band on concern the United States will soon start to scale back its monetary stimulus, but some strategists say investors are starting to take a more relaxed view.
"Investors are realising that when policy support starts to be wound down, it will be because the underlying economy is looking that much better, so it's not quite as scary a prospect that it maybe seemed to be even a month or so ago," Ian Williams, equity strategist at Peel Hunt, said.
The FTSEurofirst 300 was up 0.5 percent at 1,301.50 points by 0844 GMT, within a whisker of a 5-1/2-year closing high of 1,304.25 on Monday.
Tullow Oil advanced 2.4 percent after saying its Kenya onshore exploration well found oil.
"The 5th consecutive discovery in the first rift basin to be tested in Kenya should add to confidence that Tullow's acreage will contain very material oil resources," Liberum Capital said in a note. "We expect more value to be added in through exploration in 2014 and retain our Buy recommendation."
The market gains came after the U.S. Dow Jones index closed above the psychologically key 16,000 points level for the first time on Thursday. Japanese stocks scaled six-month peaks after U.S. economic data showed its labour market was slowly improving and inflation remained subdued.
Europe's fear gauge, the Euro STOXX 50 Volatility index , fell to a level not seen since January, a sign investor risk aversion has dropped sharply. The lower the index, which is based on put and call options on Euro STOXX 50 stocks , the higher investors' appetite for risk.
The FTSEurofirst 300 has been trading in a 40-point range stretching back to late October. Uncertainty over U.S. monetary policy and subdued European earnings made investors reluctant to put on meaningful positions.
The stimulus has proved a major driver for European equities. The STOXX Europe 600 has rallied around 18 percent since a late June trough, as investors have moved out of safe bonds and into higher-yielding assets, such as stocks.
This has propelled valuations above their long-term averages, with the STOXX Europe 600 on a 12-month forward price/earnings ratio of 13.4 times against its 10-year average of 12 times, Thomson Reuters Datastream shows.
Yet investors are still putting their money into equities. European shares enjoyed a 21st straight week of inflows from U.S. investors in the seven days to Nov 20, according to Thomson Reuters' Lipper service. That was the longest streak of weekly inflows since Lipper started to monitor flows in 1992.
"Just when you see the valuations are starting to cap the upside, you've got the ... argument, 'actually, we've still got cash, where do we put it? Even at these valuations equities relatively still look like the most sensible place'," Peel Hunt's Williams said.
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