European stocks close firm as banks, autos advance

European share indexes closed about half a per cent higher yesterday, led by bank stocks on speculation Royal Bank of Scotland may bid for Dutch peer ABN AMRO, while a firm dollar lifted exporters.

Traders shrugged off a surprise jump in US weekly jobless claims and the threat of higher energy prices after a spike in crude oil prices late in the session.

ABN rose 3.6 per cent to €20.48 after US brokerage Sandford Bernstein said RBS may be tempted to bid about €25 a share for ABN. RBS shares closed little changed at 1,752 pence, with many traders sceptical of a deal. Still, the merger and acquisition speculation spurred gains elsewhere in the sector, with Deutsche Bank up 3.2 per cent.

The FTSEurofirst 300 index closed up 0.5 per cent at 1,049.2 points, leaving it only about three points below this month's 2-1/2 year high.

The narrower DJ Euro Stoxx 50 index rose 0.7 per cent to 2,966.2 points.

Strategists at Smith Barney said they expected this year to be another positive year for European equities, targeting total returns of 15-20 per cent over the next 12 months.

"Economic and corporate profit growth is likely to remain robust over the coming 12 months. European equities still look cheap on absolute and relative valuation measures," Smith Barney said, adding it expected corporate liquidity to be a major driver of share prices.

Dealings were lighter than usual yesterday as some Continental European markets were shut for Epiphany.

Stocks rose in New York, helping trim losses from a sluggish start to the year, despite a surprise 43,000 jump in initial weekly jobless claims.

The blue-chip Dow Jones industrial average was 0.4 per cent higher at 10,644.7 points, while the Nasdaq Composite Index had risen 0.3 per cent to 2,096.7 points by 1720 GMT.

"We still need to pay attention to what happens on Wall Street for direction," said Stuart Fraser, investment director at Standard Life, dismissing the argument that Europe could "de-couple" from US markets this year. "You can never de-couple direction. We could outperform, but I don't believe Europe will de-couple direction."

Around Europe, London's FTSE 100 closed 0.4 per cent higher, while Paris's CAC-40 ended up 0.7 per cent. In Zurich, the SMI rose 0.3 per cent, and Frankfurt's DAX closed one per cent higher. Stocks wobbled as US light crude jumped nearly four per cent to $45 a barrel on what traders said was a technical-driven rally in heating oil, but quickly recovered.

Broker upgrades, encouraging sales, and a firmer dollar sent auto-related groups higher, with the DJ Stoxx European auto sector index closing up 1.1 per cent.

Volkswagen rose three per cent after saying it would not stop trying to shave billions of euros off its cost base just because its efficiency programme will be completed by the end of the year, while French rival Renault gained 1.1 per cent after posting a 4.2 per cent rise in global sales last year.

Shares in German tyremaker Continental and French peer Michelin rose after Merrill Lynch started coverage on Continental with a "buy" rating and also rated Michelin a "buy".

Continental rose one per cent, while Michelin gained 1.9 per cent.

Shares in aerospace companies Rolls-Royce, BAE Systems and EADS all rose by around three per cent, with dealers citing a positive sector note from broker Cazenove.

On the downside, UK utility Northumbrian Water closed 3.9 per cent weaker after Dresdner Kleinwort Wasserstein cut its rating to "hold" from "buy".

Markets are looking for guidance from today's US employment report for last month, a major indicator ahead of the Federal Reserve's interest rate setting committee meeting early next month. Economists polled by Reuters expect around 175,000 jobs to have been added to non-farm payrolls.