European stocks up as earnings outweigh rate fears

European shares staged a late rally to close higher yesterday, buoyed by gains on Wall Street and a strong performance from banking stocks after Credit Suisse posted forecast-beating earnings.

Deutsche Telekom was among the biggest positive influences, climbing 2.6 per cent after ruling out entering a bidding war for UK mobile operator O2. It also announced big job cuts.

The FTSEurofirst 300 index of pan-European blue chips closed 0.3 per cent higher at 1,205.1 points on heavy turnover of more than 3.5 billion shares.

The FTSEurofirst 300 has risen for the past three sessions but is still down three per cent from a peak of 1,242 points a month ago.

Ian McLennan, global equity strategist at UBS, said the difference between the current dip and the sell-off that occurred in spring was that markets were now more realistic about global economic prospects.

"We don't see the markets this time being too pessimistic about growth. We do think there's a bit of upside, but there's no need to rush out and fill your boots," Mr McLennan said.

European stocks compared favourably with their US counterparts, where valuations were still struggling to revert to long-term norms after the excesses of the late 1990s bubble, he added. Concerns about rising interest rates kept enthusiasm for stocks in check after the Federal Reserve raised US rates for the 12th time in a row overnight and hinted further monetary tightening was needed to curb inflation.

Yields on short-dated euro zone government bonds rose to their highest level in 15 months on growing expectations that the European Central Bank would soon follow suit and raise its benchmark rate.

In New York, the blue-chip Dow Jones industrial average was 0.5 per cent higher at 10,461.8 points, while the Nasdaq Composite Index was up 0.9 per cent to 2,133 points.

Around Europe, London's FTSE 100 closed 0.3 per cent higher, while Paris's CAC-40 ended down 0.1 per cent. In Zurich, the SMI rose 0.2 per cent, and Frankfurt's DAX closed 0.7 per cent up.

Germany dominated the corporate news-flow, with Deutsche Telekom's plans to cut 32,000 staff in its home market in three years centre stage.

"It was known that Telekom had surplus staff, above all in the fixed-line business," said Andreas Heinold, analyst at Landesbank Baden-Wuerttemberg. "Therefore it's positive that Telekom is now dealing with this problem."

Earlier, the company's chief financial officer said it did not plan to try and top Telefonica's £17.7 billion bid for Britain's O2, a decision also welcomed by Deutsche Telekom shareholders. O2 shares fell 5.6 per cent.

Merger and acquisition activity remained a key driver, with Irish telecoms operator Eircom surging 15 per cent to a record high after saying it had received a bid approach.

Spain's Sogecable jumped 8.6 per cent after media group Prisa said it would spend almost €1 billion to boost its stake in the pay-TV firm.

Among companies reporting, tyre maker Continental rose 2.6 per cent after raising its 2005 profit forecast following a strong third quarter.

But shares in Metro AG fell 3.3 per cent after the German retailer missed third-quarter profit forecasts and issued a profit warning late on Tuesday.

"Metro was bad, which was not a big surprise, but Continental was good. It's confirmation that the industry side is doing better and the problems are more on the consumer side," said Patrik Schowitz, equities strategist at HSBC.

Outside Europe's biggest economy, shares in Credit Suisse rose 1.3 per cent after a forecast-beating 42 per cent rise in third-quarter net profit.

Cross town rival UBS outperformed, gaining 2.1 per cent after it posted a record third-quarter profit on Tuesday.