European stocks lifted by tame US inflation data

Tame US inflation data helped European stocks reverse earlier losses and finish higher yesterday, ending the first half of the year on a positive note.

Shares of oil companies led the gains as crude oil prices reached $71 a barrel. Total SA added 1.6 per cent, while Royal Dutch Shell rose 1.5 per cent and Statoil ASA gained 2.2 per cent.

The benchmark pan-European FTSEurofirst 300 index closed 0.6 per cent higher at 1,605.33 points, a gain of 8.2 per cent since January 1 compared with a three per cent gain in the same period in 2006.

It gained 5.9 per cent in the second quarter. "We are more than ever linked to the US market, and especially regarding inflation," said Franz Wenzel, strategist at AXA Investment Managers, in Paris.

"We are US-dependent, given the lack of other triggers to push European equities higher," he said. "If at least US stocks managed not to move downward, European shares should be okay."

The US data gave the lowest reading since March 2004 of the Federal Reserve's main inflation gauge. Core personal consumption expenditures increased by 1.9 per cent in the 12 months ending in May.

The number eased investor worries over inflation and the outlook for interest rates, sending US stocks higher at the open on Wall Street yesterday.

The data came one day after the Fed kept interest rates unchanged but cautioned against the prospect of a rate cut as it flagged persistent price pressures.

"We continue to be constructive on European equities, with companies getting into new markets and restructuring," said Michala Marcussen, chief strategist at SG Asset Management.

"For the second half, we're not wildly bullish but expect a four per cent rise, which is a fairly good number once you've added dividends to it."

Around Europe, Germany's DAX index rose 1.1 per cent, outpacing UK's FTSE 100 index, up 0.6 per cent, and France's CAC 40, up 0.8 per cent.

Among the biggest movers, Northern Rock rose 4.7 per cent after a Goldman Sachs upgrade, recovering after steep falls earlier in the week when the mortgage lender warned on profits.

Air Liquide led chemical stocks higher, adding three per cent on market talk of a leveraged buyout offer for the company, while Linde added 1.4 per cent despite analysts playing down speculation of a takeover bid.

Elsewhere, Swiss watchmaker Swatch rose 2.9 per cent on a Deutsche Bank upgrade to "buy" from "hold", while Capgemini added 1.1 per cent as talk persisted that India's Infosys could be looking to make a bid.