Steadier oil, stronger banks boost European shares

European shares rose yesterday, powered by a drop in the oil price and a recovery in the banking sector as some of the nagging concern about inflation subsided for the time being.

Bank stocks were the top performing sector on the broader market, helped by the view that the US economy is not verging on recession, while around Europe, airlines rallied on the back of the 3.8 per cent fall this week in the price of crude oil.

The FTSEurofirst 300 index of top European shares rose 0.3 per cent to 1,334.39 points, bringing its losses for May to 0.3 per cent.

"The economic figures coming out of the US are decent, so that is supportive.

"We've also had a strong week as it's the end of the month," said Philippe Gijels, a European strategist at Fortis Bank in Brussels.

"What is certainly supportive to the equity markets is the oil price coming down a bit, and we hope of course it will fall further and decrease inflationary fears."

Even though market gauges of investor inflation expectations stood near their highest for several years and a raft of European price data showed pressure is mounting, more upbeat data from the United States helped support the equity market.

UniCredit, BNP Paribas and ING were all among the top positive weights on the broader market, rising between 0.7 and 3 per cent, helping to limit the weekly loss in the DJStoxx index of European banks to 0.7 per cent, making this its best weekly performance in five weeks.

British banks put on a more muted performance, with HBOS falling 3.4 per cent, Royal Bank of Scotland shedding 1.4 per cent and Barclays losing 0.7 per cent.

US data this week has shown stronger first-quarter growth, above-forecast orders for durable goods and new home sales, as well as better-than-expected readings of regional business activity and consumer sentiment that overall convey the impression that the world's largest economy has so far avoided recession.

"US preliminary GDP for Q1 duly came in at plus 0.9 per cent, which rather makes a mockery of all that talk of recession over the past six months or so," Simon Denham, managing director at Capital Spreads, wrote in a note.

The FTSEurofirst 300 has fallen by 11 per cent this year, dragged down by multi-billion-dollar write-downs at the investment banks with products linked to the declining US housing market, as well as this year's 33 per cent rise in the price of crude oil.

Analysts believe that even a drop in crude oil will not push price pressures far from investors' minds, as reflected by the rise in break-even inflation rates - a market gauge of inflation expectations - which rose to multi-year highs on Thursday.

"Estimates of $200 per barrel out there are too high as there are real inventories in the producer countries, and demand is likely to be hurt by a weaker economy," said Victor Peiro Perez, head of strategy at Caja Madrid Bolsa in Madrid. "We expect oil to stay between $100 and $120, but inflation will remain the most important issue in the market."

Investors worry that higher inflation could prevent the US Federal Reserve from adding to the 2.25 percentage points it has served up this year in equities-friendly rate cuts. It could also further reduce any probability of a lowering in euro-zone borrowing costs.

Mining and oil stocks have been the best performers among 18 DJ Stoxx European sector indexes in Europe this year, with miners gaining 10.5 per cent and oils breaking even, compared to a 12 per cent drop in the broader STOXX 600 index and a 20 per cent fall in banks.