European stocks end at 39-month highs, utilities lead

European equities closed at 39-month highs yesterday, driven by hopes of consolidation in the utilities and banking sectors, which pushed up Spain's Endesa and bank Lloyds TSB.

The pan-European FTSEurofirst index of 300 blue chips ended 0.9 per cent stronger at 1,201.1 points, its highest closing level since it hit 1,212 points in late May 2002.

European markets have outperformed international peers, with the FTSEurofirst index now up 15 per cent so far this year as investors raise company earnings estimates on robust growth.

The DJ Stoxx utility sector index jumped for the fifth straight day and added 1.5 per cent, pumped by a 7.6 per cent rally in Endesa after Gas Natural made a unsolicited takeover bid for its larger rival.

Power utility Iberdrola rose 2.5 per cent on hopes it would be rewarded if the deal succeeds with an agreement to buy the assets from the new firm to ease competition concerns.

"We upgrade Endesa to a hold, but the main winner from this deal would be Iberdrola as it would also be buying international assets from Gas Natural," Dresdner Kleinwort Wasserstein analysts said in a note.

Other gainers included Deutsche Bank, up nearly five per cent as Merrill Lynch raised its rating to "buy and increased its price target to €94 from 76, citing increased confidence in Deutsche's strategic direction and diversification.

Spain's 35-share IBEX was among the main gainers and rallied 1.2 per cent to 10,373.2 points, a near five-year high.

Cesar Martinez, chief of equities at Spanish fund manager GesMadrid said he expected consolidation activity in the utilities and banking sectors to support Spanish stocks.

"In Europe, we have positive surprises coming from company earnings," said Mr Martinez, but added that he was looking to raise exposure in defensive sectors such as food, beverages, and telecoms.

"We are looking at being defensive from this point to the rest of the year."

Stocks were also boosted by gains on Wall Street, while crude oil prices eased to $66 a barrel as oil production was slowly recovering from last week's deadly Hurricane Katrina.

London's FTSE 100 index closed 0.4 per cent firmer, Frankfurt's DAX put on 1.2 per cent while both Paris's CAC 40 and Zurich's SMI rose about one per cent.

Utility Scottish Power gained 2.2 per cent following news of a possible cash bid from German utility E.ON. British bank Lloyds TSB advanced 1.7 per cent on persistent talk it could be a takeover target, with Spain's BBVA seen as a possible bidder.

AXA advanced 2.3 per cent after the French insurer reported forecast-beating first-half profits and said it was on track for strong 2005 earnings growth despite Hurricane Katrina, which has clouded the industry outlook.