European stocks rally to three-month highs

European stocks shook off their earlier weakness to rally to a three-month high yesterday, boosted by gains in technology stocks, as muted US inflation data eased worries about further US interest rate rises.

Among heavyweight gainers, UBS rose after a forecast-beating profit jump, while utility E.ON climbed after raising its full-year profit outlook.

The pan-European FTSEurofirst index of 300 leading shares closed up 0.9 per cent at 1,355.4 points, its highest close since mid-May. The index earlier dipped as low as 1,339.3.

"The proximate cause is the numbers today, of course, but there is a little more confidence. There can be no more bearish news you can throw at this market," said Mark Tinker, head of strategy at broker Execution.

"It's got itself so gloomy, now we're seeing a little bit of contrarian thinking coming back in."

Across Europe, the FTSE 100 was up 0.5 per cent, while the DAX was up 1.5 per cent and the CAC 40 added 1.4 per cent. Some markets, including Italy and Greece, closed for Assumption Day. A government report showing US producer prices barely edged up last month, with inflation muted at the wholesale level, buoyed expectations that the US Federal Reserve would keep interest rates on hold.

The DJ Stoxx technology index gained 2.6 per cent, lifted by a 4.1 per cent gain in STMicroelectronics, with Alcatel up three per cent and Ericsson up 4.2 per cent.

Traders say stronger chip prices helped the gains, while Monday's upbeat note from Morgan Stanley also provided a boost.

"They're high beta stocks, which are obviously going to fly when the market goes up; they've been a massively beaten up sector," said a trader.

"The whole sector's gone mad in the States, as well, and that's given it another boost this afternoon."

The Tech-heavy Nasdaq was up 1.6 per cent. Chemical makers gained after crude oil slid to around $73 a barrel as concerns over threats to Middle East supply eased.

Linde added 2.9 per cent, and Bayer rose two per cent, while Dutch chemical group Akzo Nobel added four per cent after confirming it would seek shareholder approval to float a 20 to 30 per cent stake in its Organon Biosciences unit.

Among financial stocks, UBS added 3.4 per cent after the world's largest wealth manager posted a 47 per cent quarterly profit jump, but cautioned the second half could prove harder.

Elsewhere in the sector, Zurich added 1.9 per cent, supported by a price target upgrade.

"Although we think the market looks reasonable value, we are very concerned about the earnings, so we are quite defensive and sitting on quite a lot of cash," said Andrea Williams, head of European equities at Royal London Asset Management.

"We've got to feel a bit more pain to get the market lower before we would reinvest that cash in cyclical areas, because we still think those cyclical stocks are too expensive."