M&A talk, earnings help European stocks close higher

European shares rose yesterday ahead of a key US interest rate decision, lifted by merger and acquisition talk, notably involving miner Rio Tinto, and strong earnings from bank BNP Paribas.

The pan-European FTSEurofirst 300 index ended with a gain of 0.21 per cent at 1,585.01 points, having earlier touched a high of 1,590.81.

Rio Tinto closed up almost 11 per cent at 3,660 pence after surging to 4,000 pence amid market speculation of a bid from BHP Billiton, whose shares put on 5.4 per cent. Rio Tinto said it was not aware of any takeover approach from BHP, which declined to comment.

"Mergers and acquisitions and rumours have driven the market very strongly and we have to continue to follow the uptrend of the market and be really invested," said Emmanuel Soupre, head of French equity funds at Neuflize Gestion.

"If liquidity and the present level of interest rates continue, it opens the possibility of new bids," he said.

Italian bank Capitalia rallied 4.2 per cent, with traders citing renewed merger speculation. One mentioned talk of a tie-up with Monte dei Paschi di Siena while a second named UniCredit as potential suitor.

The rumours of Unicredit's interest in Capitalia pushed down French Societe Generale, which has been seen as another bid target for Unicredit. Societe Generale fell 2.6 per cent while UniCredit advanced one per cent.

HVB equity strategist Gerhard Schwarz saw the lively M&A activity and robust corporate profits helping European shares narrow a valuation gap with US stocks in the coming months.

According to HVB, companies in the broad European DJ STOXX 600 index trade on average at 12.9 times forecast 2008 earnings compared with 14.3 times for US S&P 500 firms.

"Corporate profits and M&A will deliver more positive impulses," Mr Schwarz said in a note.

AXA Investment Managers said the stock-market environment was favourable, helped by more upbeat global economic growth forecasts than a few months ago.

"Thus corporate earnings remain good," it said, adding that equity valuations looked attractive.

BNP Paribas reported quarterly profits above market expectations, sending its shares up 4.2 per cent to €91.15.

"The outlook for BNP Paribas remains really good," WestLB said. "The valuation is still attractive as the well-managed bank is trading below the European sector average," it said, reiterating its "buy" rating and target price of €103.

Germany's Commerzbank rose 2.8 per cent after it released detailed first-quarter results.

"Progress was good across the board (and) the detailed numbers have provided some further 'juice'," Bear Stearns said, adding it expected Commerzbank "to benefit from the high level of corporate activity in the bank sector and Germany's improving economic prospects".

Generali shares rose 1.9 per cent after the Italian insurer's first-quarter results and forecast of a higher 2007 profit.

"Generali is on track to achieve our full-year 2007 net income estimate of €2.8 billion and to continue to deliver its strategic plan targets," Citigroup said in a note, adding, however, that the stock's valuation remained "uninspiring".

"With the stock trading more or less in line with its fair value, we find it difficult to get more enthusiastic on the investment case," Citigroup said.

Another insurer, Dutch Aegon, fell 2.9 per cent after reporting first-quarter earnings below market forecasts. "The market's negative reaction... looks overdone," Bernstein Research said in a note. Aegon's failure to meet market expectations was "largely down to 'one-off' financial shifts rather than any fundamental weakness," Bernstein said.

Focus was also on the US Federal Reserve, which is widely expected to leave benchmark US rates at 5.25 per cent. The central bank's post-meeting statement later in the day could give some guidance on any future rate moves, analysts said.

"We are with the unanimous market consensus projecting that rates will remain unchanged at 5.25 per cent... This will leave focus on the FOMC 'balance of risks' statement as investors speculate about the possibility of monetary easing later in the year," said Tullett Prebon economist Lena Komileva.