European shares end higher cheered by Deutsche, ISM

A rally in Deutsche Bank shares and US data, which lifted expectations of a Fed interest rate cut, cheered European stock markets yesterday, with the benchmark index hitting a four-week high.

Shares in Deutsche Bank rose 2.9 per cent to a two-week high after Josef Ackermann, chief executive of Germany's biggest bank, said the outlook for banks had begun to brighten after weeks of credit market turmoil.

The DJ Stoxx banks index rose 0.7 per cent, with Societe Generale up 2.1 per cent and CS Group adding 1.8 per cent.

"It is the positive outlook that supports the (Deutsche Bank) share price, the tendency that markets seem to stabilise again and that business is going well," WestLB analyst Georg Kanders said. "It is all not as bad as one would have thought."

The FTSEurofirst 300 index of top European shares rose 0.66 per cent to 1,549.41 points - its highest close since August 8 - having been down as much as 0.7 per cent earlier.

The benchmark index, now up 4.4 per cent on the year, is down over five per cent since reaching a multi-year high of 1,635.58 in mid-July, as rising defaults in US sub-prime, or high-risk, mortgages triggered a global flight to safer assets.

European stock markets rallied in the afternoon, echoing a rise in US equity indexes on the back of US data, which was interpreted by economists as boosting the case for the Federal Reserve to cut interest rates at its September 18 policy meeting.

Expansion in US manufacturing slowed in August as a decline in new orders led factory managers to opt for caution, with the Institute for Supply Management's (ISM) index of national factory activity hitting its lowest level since March.

"The likelihood of a rate cut at the Fed's next meeting has certainly risen," German bank NordLB said in a note.

In a global equity research note published yesterday before the ISM release, Credit Suisse said economic data and policy response to that data "will be critical for the direction for equity markets over the next one-to-three months."

Bernard McAllinden, a strategist at NCB Stockbrokers, said: "the key focus for markets now, post all of this shake-out, is the real economy because that has implications for earnings."

On that theme, Morgan Stanley said there seemed to be "a good chance that the next downturn in the developed economies will be the most severe in a generation".

"European financial markets are almost as much stressed by the credit crisis as US ones. This is likely to have an impact on corporate funding and thus on corporate spending," Morgan Stanley said in a global economic research note.

And JP Morgan said that even though Fed rate cuts are expected to support stock market sentiment, the historical evidence showed that US equities had fallen over the three months following a first rate cut on five out of nine occasions.

For investors in European equities, the next focal point is the European Central Bank's (ECB) monetary policy meeting tomorrow, with key interest rates likely to remain unchanged.

"The recent financial turmoil will induce the ECB to adopt a 'wait and see' approach," BNP Paribas said.

Goldman Sachs also said it expected the ECB to hold fire. "European banks are much more exposed to the US housing market than previously thought... financial conditions facing European businesses and consumers will tighten," it said.

Yesterday's leading losers in Europe included French retailer Carrefour, down 1.7 per cent after news that its shares will exit the DJ STOXX 50 index effective September 17.

French utility Gaz de France fell 2.3 per cent, extending losses from Monday on uncertainties about the terms of its €90-billion merger with rival Suez, whose shares lost 1.6 per cent.

Among gainers outside financials, Royal Dutch Shell rose three per cent. UBS raised the stock to "buy" from "neutral".

Also in the oil sector, BP gained 1.9 per cent with ING lifting its price target to 685 pence from 680.

Copper miner Kazakhmys rose 2.6 per cent after posting a higher half-year profit and announcing a $700 million return to shareholders via a buyback and dividends.

A profit rise and buyback plan also lifted property group Unibail Rodamco, whose shares advanced 4.6 per cent, outpacing a European real estate sector index, which was up 1.3 per cent.