Banks fuel rally in Europe shares, US worries remain

Financial stocks drove European shares up yesterday after Standard Chartered delivered upbeat results, but the outlook for the US economy remained a concern.

Asia-focused Standard Chartered hit a three-week high, rising nearly eight per cent to top gainers on the broader European market.

European insurers including Axa and Allianz also featured among stocks on the rise as conviction grew in the investment community that a rescue package for the top US bond insurers may be imminent.

The FTSEurofirst 300 index ended up 1.41 per cent at 1,361.18 points, close to its day's high. Advancing issues outnumbered decliners by about 4.4 to one.

But US data showed a sharp drop in consumer confidence this month, while producer price inflation picked up by more than expected in January, which did not augur well for future consumer spending - the engine of US economic growth.

"In general, the fundamental picture is still not that encouraging so we must place a big question mark on the durability of the current upswing," said UniCredit analyst Gerhard Schwarz.

The FTSEurofirst 300 has fallen by nearly ten per cent this year and, with so much doubt lingering over the likelihood of a US recession, gains will be limited.

"We have to deal with uncertainties and that is certainly a burden for the market going forward," Schwarz said. "Unless we get a clear indication out of the US that the worst is over, that will weigh on the market."

Standard Chartered beat forecasts with a 27 per cent rise in 2007 profits and expects another strong year as Asian markets are well placed to continue to outperform western economies.

This helped shares in HSBC, Royal Bank of Scotland and Banco Santander which gained between 2.6 and 4.2 per cent.

Within the financial sector, Axa rose 3.7 per cent and German peer Allianz added three per cent despite price target cuts from JP Morgan, Lehman Brothers and UBS.

"These two sectors (banking and insurance) have been absolutely cremated in the last few months," said Edmund Shing, a strategist with BNP Paribas in Paris, adding the sectors were recovering because it was not clear they had subprime problems.

Spanish construction and infrastructure company Ferrovial ranked among the top gainers on the FTSEurofirst 300, rising nearly nine per cent as traders cited a short squeeze after the company posted a 31 per cent rise in 2007 core earnings.

The stock has fallen by 13 per cent in the past two months and had been lingering around three-year lows.

Fellow Spanish builder Sacyr Vallehermoso also rallied, gaining around five per cent.

Also among gainers was Deutsche Telekom, which rallied 0.9 percent after Blackstone, the US private equity firm, said it may increase its 4.5 per cent stake in the German company.

Signals from the European economy continued to be mixed.