European shares rise as inflation worries ease

European shares closed higher yesterday, recovering from losses earlier in the session, boosted by takeover talk and the strong performance of US stocks after data indicated moderating inflation.

RWE was among top gainers, rising 6.1 per cent as Germany's largest utility became the latest subject of takeover speculation after a radio broadcaster reported that French state-owned utility EDF was planning to buy it.

Societe Generale shares were up almost four per cent and led the DJ Stoxx 50 index. The head of the French bank identified eight banks with which it could strike a possible merger deal, a newsletter from the French CGT trade union said. The FTSEurofirst index of top European shares unofficially closed 0.6 per cent higher at 1,582.09 points, after the index fell as low as 1,554.1 earlier, its lowest level in three weeks.

France's CAC 40 unofficially closed 0.6 per cent higher, Germany's DAX gained 0.9 per cent and Britain's FTSE 100 rose 0.6 percent.

"The overall sentiment remains positive," said Petra von Kerssenbrock, analyst at Commerzbank. "We still have a lot of liquidity in the markets," she added.

Gerhard Schwarz, HVB equity strategist, said: "The macroeconomic environment for European equities remains favourable. The price/earnings valuation in Europe is currently near the highs for the last five years."

European shares moved into positive territory around midday, tracking US stocks, which rebounded from their steepest drop in two months after core producer price data indicated moderating inflation, supporting the view that the Federal Reserve would trim rates this year.

"Inflation worries have eased after the Federal Reserve in its recent comments pointed stronger towards inflationary risks than to economic growth risks in the United States," Anne-Kristin Yasuda, strategist at Landesbank Berlin, said.

Also US retail sales fell 0.2 per cent in April as soaring gasoline prices and a slumping housing industry sapped consumers' appetite for spending, data showed.

Merger talk pushed the DJ Stoxx European basic resources index up two per cent. Rio Tinto gained 3.2 per cent as traders pointed to renewed speculation that rival BHP Billiton was considering an $100 billion plus bid for the miner.