* FTSEurofirst 300 up 1.2 pct, Euro STOXX 50 up 1.5 pct
* Generali leads gainers after clean-up plan
* Volatility tumbles as investors bet on further equity
By Francesco Canepa
LONDON, March 14 European shares surged to fresh
4-1/2 year highs on Thursday as upbeat corporate updates,
including from insurer Generali, and U.S. economic
data gave new impetus to the rally.
Europe's third-largest insurance firm, Generali,
led gainers, rising 9.4 percent in volume over three times its
90-day average, after announcing plans to clean up its balance
sheet to restore its profitability.
Salt miner K+S AG also rallied after raising its
yearly outlook while telecom gear makers Ericsson and
Alcatel-Lucent were boosted by the prospect of hefty
mobile technology investments in China.
They helped the FTSEurofirst 300 index of blue chip
European shares rise 1.2 percent to 1,207.83 points - a level
not seen since August 2008.
The index extended gains after lower-than-expected weekly
U.S. jobless claims provided new evidence the world's largest
economy is recovering.
Separate U.S. data pointing to a lack of price pressure was
seen as giving the Federal Reserve scope to maintain its very
easy monetary policy.
Despite the market's heady levels, Robert Farago, head of
asset allocation at Schroders Private Banking, was holding on to
his "overweight" positions in shares, betting that a global
economic improvement would boost the asset class further in the
"We're not upping risk at this point but if we were to get
new money in, would we put it into equities? Yes, we would,"
While Farago was positive on equities in the long term, he
cautioned a correction could be around the corner after the
recent, steep rise, especially if worries such as Italy's debt
For this reason he was adding to his allocation to funds
invested in volatility, a hedge on cash equities based on option
The cost of options on euro zone shares, as measured by the
Euro STOXX 50 Volatility index, or VSTOXX, fell 10.9 percent to
close near a 5-year lows on Thursday.
The underlying Euro STOXX 50 index of euro zone
blue chips rose 1.5 percent to 2,744.70 points.
The VSTOXX extended a 43 percent tumble in the past two
weeks on growing expectations of an improvement in the global
economy, which has led hedge funds to increase their "short"
positions on volatility and long positions on equities,
according to Societe Generale data
Vincent Cassot, head of equity derivatives strategy at Soc
Gen, said investors were short-selling VSTOXX futures on
expectations they would keep falling as they get closer to their
expiry date .
Short sellers borrow a security and sell it, betting its
price would fall by the time they have to return it to the
Volatility future contracts tend to lose value as they
approach maturity barring a spike in volatility. However,
contracts tend to cost more further into the future because
uncertainty is higher.
"It's seen as an easy game (because) the level of the
futures is rising with the maturity," Cassot said.
"It costs to be long while you make profits when you're
short but being short is much more risky in case of vol spike."