European shares up 1.9 per cent on telecoms, energy

European equities closed higher for the fifth session in a row yesterday, as stronger telecom shares and energy stocks boosted by a higher crude oil price outpaced weaker automobiles, which were hit by falling car demand.

The FTSEurofirst 300 index of top European shares rose 1.9 per cent to 873.01 points, the highest close since mid-November last year. It plunged 45 per cent last year, but is up 16 per cent since hitting a five-and-a-half-year low last November.

Telecoms were one of the biggest gainers on the first full day of this year for many, with Swisscom rising five per cent, Cable and Wireless adding 4.6 per cent, Vodafone up 4.4 per cent and Portugal Telecom rising 4.6 per cent.

The market drew strength from news that US President-elect Barack Obama was seeking as much as $310 billion in tax cuts as part of a massive stimulus plan to counter what policymakers warned could be a prolonged period of economic stagnation and deflation.

In Germany, Chancellor Angela Merkel met her coalition partners to discuss a second fiscal stimulus deal worth up to €50 billion ($69.63 billion) on top of last year's €31 billion package.

But analysts remained cautious and said the markets faced another difficult year after posting record declines last year, hit by a credit crisis that began with US mortgage defaults in 2007 and threatens much of the world with deep recession.

"The outlook is not really encouraging. We would anticipate that there is still going to be a lot of bad news out there that will be reflected in reduced valuations across all sectors," said Neil Parker, market strategist at Royal Bank of Scotland.

"We have to get through the year-end reporting season, and once we really know how badly affected a lot of businesses have been from the global slowdown, then we will be able to make a better judgement on how balance sheets and how profitability will be affected throughout this year and the following year."

Citigroup downgraded European banking, chemicals, financial services, technology and industrial goods and services sectors to "underweight," saying firms will find it difficult to grow this year with resilience in earnings and dividends seen to be rare.

But energy stocks tracked crude prices, which rose more than two per cent. BP, BG Group and Tullow Oil added between 1.3 and 4.1 per cent.

Banks were mixed, with Credit Suisse jumping 12 per cent, UBS up 7.6 per cent and Standard Chartered adding 6.2 per cent. But HBOS lost more than nine per cent and Lloyds TSB slipped 3.3 per cent.

Defensive pharmaceutical shares were in demand, with UCB rising 4.5 per cent, Roche gaining 3.8 per cent and Novartis adding 2.5 per cent.

"It is a very different start from January last year. We are clearly coming off one of the worst years in history so we would expect to see a positive start," said Darren Winder, strategist at Cazenove. "Investors are trying to be more positive because of the severity of last year," he added.

Data showed investor sentiment in the eurozone improved in January, Spanish inflation last year was the lowest for a decade and Italian inflation fell to a 14-month low, putting pressure on the European Central Bank to keep cutting interest rates.

A Reuters poll showed that the Bank of England is expected to slash interest rates by another 50 basis points to a record low when it meets on Thursday as evidence piles up that the British economy has slumped into a deep recession.

Automobile shares were under pressure, with France and Japan posting steep falls last month car sales, adding to a swathe of depressing data from an industry bearing the brunt of wrecked consumer confidence.