European shares hit two-week closing highs

European equities set two-week closing highs yesterday as takeover activity and robust economic growth buoyed global markets.

Banks including BNP Paribas and Deutsche Bank were among the gainers.

Danone rose as much as 4.2 per cent as the French food group said it is in exclusive talks to sell its biscuit and cereal unit to Kraft Foods for €5.3 billion. Analysts said Danone could use cash from the sale to make acquisitions.

The pan-European FTSEurofirst 300 index closed 0.8 per cent higher at 1,613.2, its highest close since June 20 but below yesterday's intra-day high of 1,615.5.

US stocks also advanced in a holiday-shortened session. A report showing factory orders, excluding the volatile transportation sector, rose in May, added to optimism about the state of the US economy, following a surprising rise of a manufacturing index on Monday.

The benchmark European FTSEurofirst 300 index has risen nearly nine per cent so far this year but some fund managers said inflation worries remained a concern for markets. "The one thing we are worried about is the outlook for inflation because I think the markets arguably aren't pricing great inflationary threats into certain markets," said David Hussey, head of pan-European equities at MFC Global Investment Management.

"And if we did get an inflation threat, I think we could have a bit of a setback. So, that's the one thing we are watching closely."

Last month, worries over the prospect of rising interest rates and costlier credit halted a rally in European shares as the market worried that higher borrowing costs might derail Europe's takeover spree.

"It's now even more apparent that the current cyclical boom will continue longer than expected in Europe," said Ralf Groenemeyer, strategist at Commerzbank.

"The fear of declining earnings momentum is vanishing, and I think this is one of the key reasons for the market to continue to rise because it implies that leveraged buyout firms and private equity firms may continue to look for attractively priced equities, and you can find all sorts of them in Europe at the moment."