European shares rally on Rita relief

European shares hit new 40-month highs yesterday after Hurricane Rita caused less damage than feared on the US Gulf Coast, prompting oil prices to steady and investors to return to storm-exposed insurers and chemicals.

Carmakers also gained, with stocks such as Peugeot and DaimlerChrysler benefiting as investors shifted out of Porsche on news the luxury carmaker planned to buy a 20 per cent voting stake in Volkswagen. Porsche ended down 10 per cent on concerns over how the company was using its cash.

The FTSEurofirst 300 index of leading European shares added 1.2 per cent to 1,221.96 points - its highest close since May 16. The narrower DJ Euro STOXX 50 closed 2.1 per cent higher at 3,400.93.

Insurers were among the top blue-chip gainers, with Allianz , Axa and re-insurer Munich Re all rallying around three per cent as worries eased that they would have to make additional hefty insurance payouts after the record damage caused by Hurricane Katrina last month.

Shares in European chemicals companies such as BASF also gained on relief that their plants in Texas had escaped major damage from Hurricane Rita.

"The chemical industry was especially exposed to Rita - BASF runs large facilities at Port Arthur, and Bayer and Lanxess at Baytown, and now that the hurricane has come and gone, there is considerable relief," said Landesbank Rheinland-Pfalz analyst Silke Stegemann.

A stabilisation of oil prices at around $64 a barrel further soothed market worries over the effect of soaring raw-material prices on corporate profitability.

But with oil prices still up more than 50 per cent since the start of the year, and signs of slowing US economic growth, observers said the backdrop for equity markets appeared less favourable now than a few months ago.

"Risks remain and uncertainty is on the rise, this was in substance the message of G7 finance ministers and central bankers this weekend," said economist Valerie Plagnol at French broker CM-CIC Securities. "Even if global economic growth remains solid, it is suffering from high oil prices, US deficits and the rise of protectionism."

But yesterday, the gains by the heavily-weighted insurers and chemicals stocks helped prop Germany's DAX blue-chip index up 2.4 per cent. Paris's CAC 40 and London's FTSE 100 trailed with gains of two per cent and 0.7 per cent, respectively.

Alcatel led technology issues, surging 4.6 per cent after Morgan Stanley started coverage of the French telecoms equipment maker at "overweight", while miners Rio Tinto and BHP Billiton rallied after Australian bank Macquarie increased its earnings estimates for them.

On the downside, Spanish construction firm ACS slipped 7.5 per cent after the stock market regulator lifted a trading suspension. The regulator suspended trade in the shares on Friday, before ACS announced it had bought 22 per cent of Spain's number-three power firm Union Fenosa for €2.22 billion. Union Fenosa shares fell 3.3 per cent.