Eurostocks storm ahead for second day on Iraq hope

European share prices stormed ahead for a second day yesterday to clock up their best back-to-back gain in years, with a further advance predicted if there are further moves to resolve the Iraq crisis swiftly.

By 1640 GMT, with only Frankfurt still trading, the DJ Stoxx index of top 600 European stocks was up 4.15 per cent to 179.11 points, adding to Thursday's 5.76 per cent rally.

The index's two-day gain of 9.92 per cent is its best since records on the benchmark began in 1987 as a slew of blue chips notched up double-digit gains.

"I would not say we have had fantastic news in the last two days but there is a little bit of an opening in the Iraqi situation and things may be getting a bit better there," said Teun Draaisma, a European strategist at Morgan Stanley.

Some investors such as hedge funds were being forced to cover short positions after being caught out by the continued rallying, Draaisma said.

Crude oil prices slumped in anticipation that a US war against Iraq could start soon and finish quickly, stoking optimism in Europe's stock market that has been spooked for months by the build-up to a possible war.

"Can it go further? We think so as valuations continue to be very attractive and the catalyst might be more progress on Iraq," Draaisma said.

The FTSE Eurotop 300 index was up 4.4 per cent at 756 points after rocketing six per cent on Thursday, its biggest one-day gain ever. It is poised to end the week up 2.6 per cent after hitting a six-year low on Wednesday.

It is still down 11 per cent for the year. Dealings have been solid during the two-day rally. "The good volumes suggest this could carry on a bit longer," said John Hatherly, a fund manager at M&G.

"However, two days of gains do not prove anything apart from the fact the market was technically oversold in the short term. The key is whether this turns into a wholesale rally, and what determines that is if we get newsflow that is better," Hatherly said.

All eyes now turn to a summit tomorrow when the United States, Britain and Spain look to a "final pursuit" of a UN resolution on Iraqi disarmament.

Many investors see hostilities starting soon in Iraq, lifting some of the uncertainty that has plagued markets and triggering the week's extreme volatility.

On Wall Street, the Dow Jones industrial average up one per cent at 7,901 points, with the Nasdaq Composite 0.5 per cent ahead.

The DJ Stoxx European insurance sector led the market higher with a 9.4 per cent rise, adding to Thursday's 8.6 per cent advance from a decade low earlier in the week.

The sector has been hammered by the three-year old bear market which has shrivelled the value of equities that insurance companies hold in their asset portfolios.

Among the top advancers, Swiss Reinsurance rose 18.3 per cent to 64.50 Swiss francs, while German rival Munich Re gained 14 per cent to €78.36. France's Axa jumped 17 per cent to 12.06 euros.

On the negative side German drug group Bayer fell on worries over legal costs for a recalled drug.

The stock hit fresh lows as investors fretted that claims over Baycol could lead to damages on a scale similar to long-running asbestos suits against industrial companies in the United States. Bayer was down three per cent at €10.54.

Some defensive shares such as utilities and tobacco fell as investors shifted money into battered sectors like technology and media.

French-Belgian bank Dexia rose 11 per cent to €9.05 in Paris after the French-Belgian banking group reported in line results. However, the bank joined the ranks of companies declining to give an outlook given the current volatile market conditions.

Swiss drugs giant Roche Holding rose 5.5 per cent to 79.40 Swiss francs after the group said it expects its HIV drug Fuzeon to win European Union approval early in the second quarter of 2003 after US regulators backed it on Thursday.

Investors largely ignored the day's patchy economic numbers as momentum remained on an upward trend in the stock market, though analysts warned that fundamentals could not be ignored for long even if the Iraq crisis is resolved soon.

The usually closely-watched University of Michigan's preliminary US consumer sentiment index for March fell to 75, a decade low, against expectations of 77.6.

"At face value, it looks like it's not just geopolitical problems, but also worries about the labour data which has been very disturbing," said Ken Wattret, chief Euroland economist at BNP Paribas bank.

If the Iraq situation is resolved soon this would help improve sentiment but any sustained recovery will need a labour market in better shape as people still worry about losing their jobs, Wattret said.