European stocks rally as US rate fears wane

European shares hit a fresh two-and-a-half-month closing high yesterday, helped by strong earnings and slower-than-expected US economic growth data that suggested the Federal Reserve may soon stop raising interest rates.

Renault and Michelin buoyed the auto sector after Renault posted a forecast-beating operating margin for the first half and even though Michelin cut its full-year profit margin goal, which investors had expected.

A near two per cent drop in oil prices further boosted car makers, whose margins are eroded by rising rubber and energy prices, and other fuel-hungry companies such as airlines.

The FTSEurofirst 300 index of leading European shares closed 0.7 per cent higher at 1,344.10 points, its highest close since May 16. The index finished the week 4.2 per cent higher - its biggest weekly advance since March 2003.

Volumes were thin, with only €2.2 billion changing hands as many investors deserted their screens to head to European beaches.

The market erased earlier losses to hop into positive territory as investors took an abrupt slowdown in US economic growth in the second quarter - to 2.5 per cent from 5.6 per cent in the first quarter - as a sign that US central bankers could bring a two-year credit tightening campaign to a halt.

"The second-quarter figure confirms the slowdown, even if it was not far from what was expected. Growth remains strong, most of all against a background of inflation, but this should allow the Fed to make a pause in August," said Sophie Casanova, strategist at HSBC.

The GDP data sparked selling in oil - as slower growth raised the prospect of lower demand for energy in the world's biggest oil consumer - giving a further boost to markets. Oil was down 1.8 per cent at $73.20 at the close of European markets.

Solid corporate profits also helped bolster the market. Brewing giant SABMiller added 2.5 per cent as its first-quarter worldwide underlying beer volumes rose seven per cent, while UK pay-TV firm BSkyB gained 2.6 per cent after meeting forecasts with a one per cent rise in annual profits and saying it was on track to hit earnings expectations this year.

Diversified miner Xstrata soared 7.5 per cent as it looked set to win its long-running battle to take over nickel and copper producer Falconbridge after rival bidder Canadian miner Inco walked away.

Analysts said a successful Falconbridge bid would widen Xstrata's portfolio with the addition of nickel and offered the Swiss company good growth prospects in copper and other assets.