M&A push European stocks to new highs

European shares closed at fresh five-and-half year highs yesterday, powered by strong commodity-related stocks, takeover activity and a rise in the dollar after an upbeat reading of US jobless claims.

Nestle rallied 2.2 per cent on news it was buying the medical nutrition business of drugmaker Novartis - a $2.5 billion deal that will propel the world's largest food group to the No. 2 position globally in the fast-growing niche business of providing specialised food to hospital patients.

Consolidation talk in the airline sector also contributed to underpin sentiment, with many investors brushing aside caution ahead of today's raft of US economic reports, which include crucial data on consumer prices and industrial production.

The FTSEurofirst 300 Index of top European shares ended 0.6 per cent higher at 1,480.76 points, its ninth consecutive positive session and highest closing level since May 22, 2001.

A new dip in the euro below $1.32 bolstered sentiment. The single bloc's currency weakened after data showing a dip in the number of US workers seeking initial jobless benefits last week. The report added to recent solid economic data, suggesting a resilient economy.

"While we see some weakness in manufacturing and housing, the overall US economy is not as weak as markets are currently anticipating. As such, we see potential for the dollar to correct again," strategists at Axa Investment Managers said in a note. They expect the euro to fall back into a range between $1.25 and $1.30.

Around Europe, London's FTSE 100 index and Paris's CAC 40 both gained 0.6 per cent, while Frankfurt's DAX added 0.5 per cent and the Swiss Market Index ended 1.1 per cent firmer in Zurich.

Mining stocks led the gains, with Xstrata, Rio Tinto and BHP Billiton leaping between 1.8 per cent and 5.7 per cent, buoyed by upbeat comments from broker Cazenove and a firmer copper price. Xstrata got an extra boost from broker Morgan Stanley raising its price target.

Meanwhile, a two per cent rise in oil prices to $62.54 a barrel lifted heavily weighted energy shares, with Total up 1.2 per cent. But BP added 3.7 per cent and Lufthansa and British Airways gained over one per cent on speculation about further industry consolidation after Australia's Qantas agreed to a $8.7 billion buyout offer.

At Ryanair, shareholder approval of a planned share split, contributed to gains.

Elsewhere, Dutch retailer Ahold was up 3.4 per cent on rumours of a bid approach from private equity group Kohlberg Kravis Roberts & Co. But a source familiar with the matter said that KKK was not preparing a bid for Ahold.