European shares rally, snap five-day losing run

European equities broke a five-day losing streak yesterday in a broad-based rally, with banks up as worries of tighter corporate credit costs waned.

The pan-European index closed 2.1 per cent higher at 1,549.92, its biggest one-day rise since March 15. The index hit a five-month closing low in the previous session on concerns of a credit crunch. US stocks also rose yesterday.

Shares in Royal Bank of Scotland, HSBC, UBS and Deutsche Bank were among the biggest positive influences on the FTSEurofirst 300 index.

The index has lost five per cent since hitting a six-and-a-half-year high of 1,635.6 on July 13, but up about four per cent so far this year.

"We still find fundamentals supportive, especially for European shares. European economies are growing quite strongly and profit growth continues to be stronger than expected," said Dirk Thiels, head of global equity funds at KBC Asset Management.

The iTraxx Crossover index, the most widely watched indicator of European credit sentiment, traded at 410 basis points, some 40 basis points lower versus late Monday and below Monday's record high of 505 basis points.

"We think that the rise we have seen is only temporary because from a fundamental point of view, there isn't really any indication that these spreads should be higher," said Mr Thiels.

"The overall debt ratios of companies worldwide and especially in Europe have come down," he said.

Yesterday US stocks were supported by strong earnings and as a key inflation indicator showed a smaller-than-expected rise. Germany's 30 share DAX rose 1.7 per cent, Britain's FTSE 100 index advanced 2.5 per cent and France's CAC 40 gained 1.9 per cent.

"It's just all to do with credit spreads and risk fears. In the background, economic growth is coming through stronger than expected, and the corporate numbers, particularly on the industrial side, are being pretty strong as well," said Andrea Williams, head of European Equities at Royal London Asset Management.