LONDON Gains in telcos led European shares to a one-week closing high on Monday after Deutsche Telekom sold its T-Mobile USA unit for $39 billion, fuelling expectations of a further pick-up in mergers and acquisitions.
The pan-European FTSEurofirst 300 index of top shares ended up 1.8 percent at 1,107.89 points, its highest close in a week, with the STOXX Europe 600 telecommunications index gaining 3.7 percent.
Deutsche Telekom surged to a two-year high after selling its unit to U.S. firm AT&T in the world's biggest M&A deal this year, and said it would return cash to shareholders and refocus on organic growth.
Analysts expect the equity market to be supported by growing expectations of further M&A deals in Europe this year as the economic recovery gathers pace.
"Confidence in M&A is going to return. Companies have healthy balance sheets and M&A seems to be a natural way forward especially for those companies that can borrow cheaply," said Ana Armstrong, chairman at Distinction Asset Management.
"Telecoms have the biggest weight in our funds because they're cash-rich, pay high dividends and have low levels of debt. To spend their cash to either buy back their own stock or to acquire somebody else makes a lot of sense."
In a confirmation of a revival in the European M&A market, deals proceeds doubled on a year-over-year basis to $172.7 billion in the first quarter to March 18, 2011, with proceeds up around 2 percent in the same period compared with the previous quarter, according to Thomson Reuters Propriety Research.
Traders said signs of progress in resolving Japan's nuclear crisis also helped boost risk appetite, after engineers restored electricity to three reactors at the Fukushima plant and planned to test water pumps at the damaged facility
"The market hates uncertainty and the issues in Japan are easing which is helping," Colin McLean, managing director at fund group SVM Asset Management in Edinburgh, which has 700 million euros ($992.5 million) assets under management.
Insurers were on the rise, with the STOXX Europe 600 insurance index up 2.5 percent, recouping some hefty losses from last week when it shed 3.9 percent on uncertainty over the impact of the Japanese earthquake and tsunami.
However, traders said some caution among investors prevailed as western forces launched a second wave of air strikes on oil-rich Libya, which drove Brent crude prices to over $115 a barrel.
Technical analysis suggested further upward movement for euro zone blue chip stocks on the STOXX Europe 50 index, which has rebounded from a 3-1/2 month low to gain for the third straight session. The index closed up 2.4 percent at 2,860.81 points.
"The close of the gap in a lot of European markets, between 2,822 and 2,845 in the Euro STOXX 50 Index, is bullish and suggests further upside potential in the coming days," said Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking.
Fund managers also expect to see more gains for equities, saying money was flowing back to equities from bonds and some short positions were being covered.
"The current environment is good for equities. Fundamentals look reasonably good and there are companies which are well placed to benefit from rising inflationary expectations and moderate economic recovery," said Felicity Smith, fund manager at Bedlam Asset Management, which manages $700 million.
"The alternatives look less attractive and money is coming out of bonds because government finances look pretty stretched."
(Additional reporting by Atul Prakash and Joanne Frearson; Graphic by Scott Barber; Editing by David Cowell)