European shares rise, look set to extend two-week rally

Fri Mar 28, 2014 5:21am EDT

* FTSEurofirst 300 up 0.6 pct

* China investment promise boosts basic resources

* Volatility drops heading as month-end nears

* Insurers suffer from probe threat

By Alistair Smout

LONDON, March 28 (Reuters) - European shares rose in early deals on Friday and looked set to post gains for a second straight week after basic resources stocks received a boost from plans by China to boost investment.

The pan-European FTSEurofirst 300 was up 0.6 percent at 1,330.76 at 0904 GMT, 1.8 percent higher on the week.

The rise took gains over the last fortnight to 3.6 percent, but the index is still down 1.6 percent from a 5-1/2 year high hit in February.

Concerns about the geopolitical situation in Ukraine, slowing Chinese growth and the prospect that U.S. interest rates might rise sooner than expected have seen the index fall 1.3 percent in March.

However, recent weakness in China prompted Chinese Premier Li Keqiang to say that Beijing was ready to support the cooling economy and would push ahead with infrastructure investment.

That helped the STOXX Europe 600 Basic Resources Index climb 1.7 percent, making it the top sectoral riser in Europe.

"We're making a little bit of a jolt higher, based on hopes of some form of Chinese fiscal stimulus, but that's not the big game in town. The big question for China is whether it can deflate its credit bubble without creating a burst," said Jeremy Batstone-Carr, analyst at Charles Stanley.

"The bounce we're seeing today is a short-term effect."

Volatility on the Euro STOXX 50, a crude gauge of investor fear, has dropped by a quarter over the last weeks, indicating that investors are becoming more relaxed about the issues that have hit stock returns so far this month.

Much of the volatility has been caused by Russia's annexation of Crimea from Ukraine, which has hit stocks exposed to the Russian economy and potentially detrimental sanctions.

Austrian bank Raiffeisen, which derives over 20 percent of its revenues from Russia, nevertheless rose 3 percent on Friday.

Insurers was the only sector in negative territory with Aviva, Legal & General, Standard Life and Prudential all down between 2 and 7 percent.

Traders pointed to reports saying a UK regulator is to investigate about 30 million insurance company policies over concerns that customers are subject to "unfair" conditions.

"The falls in insurers are largely to do with this story about the government probing into issues going back decades. It's the element of the unknown, because if you're going back that far, you've absolutely no idea what that's going to encompass," CMC Markets senior sales trader Toby Morris said, comparing the situation to recent probes into banks.

"Anything that's muddy waters at the moment is not exactly flavour of the month."

Europe bourses in 2014: link.reuters.com/pap87v

Asset performance in 2014: link.reuters.com/gap87v

Today's European research round-up

(Editing by Catherine Evans)

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