Europe shares end higher as US inflation reassures

European shares rose sharply yesterday, helped by a tame reading on US core inflation that eased concerns over potential Federal Reserve rate increases and sent bond yields lower.

The FTSEurofirst 300 index of top European companies closed up 1.28 per cent at 1,625.87 points, taking its gain in the week to 3.7 per cent and wiping out its losses of the previous week, when rising bond yields seduced investors.

The European index is now up 9.5 per cent this year, driven by a cocktail of mergers and acquisitions, strong economic growth and broadly robust company results.

"Equities are marching to the tune of the bond market," Brewin Dolphin Chief Strategist Mike Lenhoff said. "Bonds had got into very extensively oversold territory and then some of the data we had was very reassuring."

Fed rate futures have wiped out any indication of a rate cut this year over the last weeks and are starting to discount the chance of a rate rise by the year end.

"The US economy is doing very well, thanks very much, and if anything the next rate move could be upwards. But the Fed will wait to see stability in the housing market before any further round of tightening," Mr Lenhoff said.

While the macro picture dominated, several individual stocks moved due to a combination of acquisition talk and bullish brokerage comments.

Wolseley, the world's largest distributor of plumbing and heating products, was among the top European gainers with a rise of five per cent, bolstered by market talk of a possible bid. The company declined to comment.

British retailer J Sainsbury climbed 4.5 per cent after Qatar's royal family raised its stake in the group to 25 per cent, fuelling speculation of a new takeover offer or a forced sale of the company's property.

Platinum miner Lonmin rose 4.7 per cent after being named by Morgan Stanley as its top pick in the sector. Anglo American rose three per cent and Antofagasta two per cent. European aerospace firm EADS climbed 3.6 per cent before the Paris Air Show next week, during which the group's Airbus unit is expected to announce a number of aircraft orders, traders said.

Overall, miners and rate-sensitive banking stocks contributed a quarter of the index's increase.

Many analysts and fund managers say that last week's rise in yields was in any case not enough reason to shift to bonds, and that the investment case for equities remained intact.

"I expect total returns of over 10 per cent from equities in the coming twelve months, whereas the coupon gain on bonds should be neutralised by the capital loss on them," said Paul Vrouwes, who helps manage around 5.3 billion euros ($7.1 billion) at ING Investment Management.