Banks lead European stocks up, strategists cautious

European shares rose yesterday as reassuring comments on banking from the US Federal Reserve and signs that UK mortgage lender Bradford & Bingley (B&B) would be bailed out buoyed financials.

Banks rose on a broad front, with Lloyds TSB up 6.3 per cent, Barclays six per cent, Credit Agricole and Royal Bank of Scotland 5.3 per cent, CS Group 4.6 per cent, Deutsche Bank 4.2 per cent and UBS 3.6 per cent.

The DJ Stoxx European bank index was the top sectoral performer with a gain of 2.9 per cent, trimming its year-to-date loss to 34 per cent.

Banking stocks have suffered amid concerns about the impact of last year's meltdown in the risky US subprime mortgage market, which has forced many financial groups to book major asset write-downs and seek emergency capital injections.

At 1115 GMT, the FTSEurofirst 300 index of top European shares was up 1.2 per cent at 1,174.99 points. The European benchmark, which lost 1.5 per cent on Tuesday, is down 22 per cent so far this year.

"The market is driven mainly by financials," said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Germany.

Federal Reserve Chairman Ben Bernanke said on Tuesday the US central bank may keep an emergency lending facility for big Wall Street firms open longer than it initially intended.

Separately, sources said six clearing banks in Britain had agreed to back the underwriters of B&B's rights issue after the troubled mortgage lender's share price fell further below the planned issue price on Tuesday.

"What Ben said about keeping the window open longer, this and Bradford & Bingley getting money ... these are positive signs," Mr Sonnenschein said.

But investors remained cautious as tensions surrounding Iran's nuclear programme pushed oil prices higher after Tuesday's steep drop. Iranian state media reported that the country had test-fired missiles with a range that could reach Israeli and US bases in the region.

"We are walking on thin ice ... We will have shaky days and weeks ahead of us. We have no clear signs that we can move up strongly," said Mr Sonnenschein.

Dominique Strauss-Kahn, the International Monetary Fund's managing director, said it was hard to know how far the global financial crisis still had to run, with the extent of further credit losses hinging on the US housing sector.

"What is sure is that the consequences for the real (economy) sector of the financial crisis are still in front of us," Mr Strauss-Kahn said.

The EU's statistics office downgraded its gross domestic product growth estimate for the euro zone to 0.7 per cent in the first quarter from 0.8 per cent previously.

The foreign trade surplus for Germany, Europe's largest economy and the world's top exporter, narrowed more than expected in May as exports fell sharply, adding to evidence that economic growth slowed sharply in the second quarter.

"The (stock) market is in the process of adapting expectations to a less optimistic view of the macro environment," Goldman Sachs said in a research note.

"And what looks cheap now may not look that cheap in the near future, should fundamentals turn even less friendly going forward," Goldman said, referring to equity valuations.

Many such valuation metrics rely on corporate earnings estimates, and Societe Generale in a strategy note said: "It may now be the turn for 2009 earnings to be revised down," as current expectations of over 13 per cent profit growth in Europe next year looked "increasingly unlikely".