LONDON (Reuters) - European stocks rallied on Wednesday, buoyed by a recovery in Asian shares, confidence in the economy and a fresh round of mergers and acquisitions, while expectations of further euro zone rate hikes boosted the euro.
U.S. light crude CLc1 held above $63 a barrel ahead of oil inventories data expected to show a fall in U.S. fuel supplies last week, while government bonds extended Tuesday’s sharp fall after a spike in U.S. producer prices pushed back the prospects of a Federal Reserve rate cut.
Europe's FTSEurofirst 300 Index .FTEU3 rose 0.5 percent to 1,484.5 points, recouping Tuesday's losses as offshore markets rebounded and another burst of M&A activity helped sooth concerns about prospects for 2007.
With earnings growth expected to slow and both margins and merger and acquisition activity at record levels, few expect European stocks to match the returns of 2006, currently around 16.5 percent.
“We’re broadly positive and we’re still at the point where we think equities are going to make money next year, but you would take less of a bet on it than you did last year,” said John Haynes, an equity strategist at Rensburg Sheppards.
Telecommunications equipment maker Ericsson (ERICb.ST) rose 1.5 percent after agreeing to buy data networking equipment vendor Redback Networks Inc. RBAK.I for $2.1 billion in cash.
Utilities .SX6P underperformed, with UK nuclear power operator British Energy BGY.L down 7 percent after saying repairs to two stations would take until the end of March, while Spanish gas distributor Enagas (ENAG.MC) fell 9 percent after a newspaper reported the government was preparing new rules on calculating investment returns.
Japan's Nikkei .N225 rose 1.4 percent to close above 17,000 points for the first time in more than seven months. A softer yen boosted exporters while comments from Bank of Japan Governor Toshihiko Fukui that consumption and prices have been somewhat weaker prompted markets to scale back expectations of a January rate rise.
Stock markets across Asia and Europe were rattled on Tuesday by a 15 percent fall in Thai stocks .SETI after government measures aimed at stopping short-term speculation on the high-flying baht currency sent foreign investors running.
Thai stocks recovered much of their losses on Wednesday, bouncing 11 percent after an abrupt U-turn to exclude equity investments but the episode was seen as damaging the credibility of the army-appointed government’s economic management.
The Thai baht THB= edged up after a 2.5 percent fall on Monday, trading around 35.6 per dollar.
Among major currencies, the euro hit another record high against the yen after Tuesday’s upbeat survey of German business sentiment firmed expectations for further euro zone rate increases.
The Ifo institute’s index rose to its highest level since German reunification.
In addition, European Central Bank President Jean-Claude Trichet, testifying at the European Parliament, said the region’s inflation rate was likely to increase again early in 2007 and that the outlook for prices was subject to upside risks.
In contrast, expectations of a January rate rise from the Bank of Japan took a knock on Tuesday after BOJ chief Fukui sounded a cautious note on consumer spending and prices, sending the yen lower against most major currencies.
“With carry trades remaining in vogue and the market holding on to the Ifo and the prospects of probably additional tightening from the ECB into 2007, that’s helping the euro and particularly euro/yen,” said Jeremy Stretch, strategist at Rabobank.”
The euro hit record highs versus the yen for the second day in a row, climbing to 156.39 yen according to Reuters data EURJPY=. The dollar dipped to around 118 yen JPY=, while the euro climbed around 0.3 percent to $1.3230 EUR=.
European government bond futures remained under pressure and at risk of extending their 11-session losing streak after Tuesday’s strong U.S. producer prices data reminded markets of inflation risks.
The March Bund future FGBLH7 fell 11 ticks to 116.78.
“Although we believe the market already has a fair degree of value in it at current yields — and 11 down days in a row is extreme — it may not be possible for the market to stage a recovery until normal trading conditions are restored in the New Year,” Nomura rate strategist Michael Trounce said in a note.
Gold XAU= held above $620 on the weaker dollar, while a rise in London stocks weighed on copper MCU3.