European shares rally towards multi-year highs, boosted by Fed

Thu Jun 19, 2014 4:03am EDT

* FTSEurofirst 300 up 0.7 pct

* Fed less hawkish than expected - analysts

* Rolls Royce top riser after buyback

By Alistair Smout

EDINBURGH, June 19 (Reuters) - European shares rose in early deals on Thursday, boosted after the Federal Reserve said the U.S. economy was making progress and committed to retaining accommodative monetary policy over the long term.

The pan-European FTSEurofirst 300 rose 0.7 percent by 0741 GMT, tracking gains overnight on Wall Street and in Asia that saw the S&P 500 hit a new record high.

The Euro STOXX Volatility index, which measures how much investors have to pay to protect gains through options and is a crude indicator of investor fear, fell to its lowest since December 2006.

The gains were made after the Fed hinted at a slightly faster pace of interest-rate increases starting next year but suggested rates in the long run would be lower than it had indicated previously.

Expectations had been building that the Fed would take a more hawkish view in order to tackle inflation that was higher than anticipated.

"Expectations going into this were probably overextended to a certain extent. There was a fear that the Fed would pick up more of a hawkish rhetoric, which they didn't do," Ioan Smith, director at KCG, said.

"It was probably patience on their part, even after the uptick in inflation in May."

The rise left the FTSEurofirst 300 just 0.1 percent off of its 2014 high set earlier this month, which was the index's highest level since January 2008.

The index has been rangebound in recent weeks as violence in Iraq has pushed up the price of oil, lifting shares of major oil companies but raising input costs for other companies, as well as squeezing consumer spending.

Brent crude held near a nine-month high above $114 a barrel on Thursday, poised for a third day of gains following a rise of more than 4 percent last week on supply concerns after Islamic militants seized much of northern Iraq.

Top blue-chip gainer in Europe was Rolls Royce, with the engine maker up 6.1 percent after it announced a one billion pound ($1.69 billion) share buyback.

Strategists at Citi recommended targeting companies that have done buybacks, finding that they usually perform well on the stock market. The bank's basket of these stocks has returned 14 percent per annum since the year 2000.

"Given the cheap debt financing and large cash piles on company balance sheets, we think companies will continue to return capital to shareholders via buybacks," strategists at Citi said in a note. "We find companies doing buybacks have tended to be strong performers."

The bank highlights oil major Royal Dutch Shell, plane maker Airbus and Swiss pharamcuetical Actelion as their top picks in Europe.

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

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

Today's European research round-up (Editing by Toby Chopra)