European shares close at three-year highs on earnings

European stocks rallied to new three-year closing highs yesterday, led by insurers which reported forecast-beating results such as Allianz, while takeover talk boosted Commerzbank, and oil firms also gained.

French utility Suez jumped six per cent, adding to the previous day's seven per cent rally on its buy-out bid of minorities in Belgian power group Electrabel, which was applauded by analysts.

A rise in US stocks, a day after the Federal Reserve eased concerns about faster interest rate hikes, also supported.

The pan-European FTSEurofirst 300 index ended 0.9 per cent stronger at 1,199.9 points, its highest level since late May 2002 on thin volumes of 2.1 billion shares. The index has rallied 15 per cent so far this year.

"The market has got momentum and might run a bit further. Earnings are coming in well and last week was full of positive macro economic surprises in the US and Europe," said Alan Zlatar, head of European equities asset management at Julius Baer.

Germany's key 30-share DAX index outperformed with a rise of 1.6 per cent and closed at a three-year high on strength in Allianz and Commerzbank.

Stocks and bonds rose after the Federal Reserve raised its benchmark interest rate on Tuesday as expected by 25 basis points and soothed fears that strong US growth would make it step up its one-year-old monetary tightening cyle. "The main fear that inflation remained strong and the Fed would be worried by it hasn't materialised and markets are relieved," said Rohini Rathour, senior analyst at investment firm Sarasin Chiswell.

"Despite the fact that we have had oil price go up to $64, it hasn't derailed corporate profitability, which means that companies are actually finding other ways to become more efficient," said Rathour.

Royal Dutch Shell put on 1.4 per cent and Total was up 0.3 per cent, with crude oil prices steady at $63 a barrel. London's FTSE 100 index underperformed with a rise of 0.3 per cent, weighed by several firms trading ex-dividend.

Paris's CAC-40 rose 0.8 per cent to a three-year high at 4,527.1 points while Italy's market hit a four-year high at 34,018 points, up also by 0.8 per cent.

Among big stock gainers, Commerzbank jumped nine per cent to a four-year high at €21.8 with heavy volumes on persistent market talk that it was a bid target.

The insurance sector was the best performer, up two per cent after strong reports from many companies.

German insurer Allianz rose 3.5 per cent after the firm said late on Tuesday that second-quarter net profit had risen by two-thirds, lifted by a strong performance across all businesses.