European shares hit 16-week high on recovery hopes

European stock markets rallied yesterday, adding to April's record gains and led by energy and industrial engineering shares on the back of economic data suggesting that the recession might be moderating.

The FTSEurofirst 300 index of top European shares ended up 1.6 per cent at 842.70 points, its highest close since January 12. Activity was dampened by a public holiday in Britain.

"We identify a significant improvement in market sentiment and increased risk appetite from investors," said Marfin Analysis in Greece.

Shares in Fiat rose 8.1 per cent after the Italian carmaker launched a plan to swallow up US General Motors' European operations, notably German Opel, to create a listed European automotive group.

"The spin-off of Fiat Auto to create a new global group would have positive consequences on the stock price," said Banca Akros analyst Gabriele Gambarova, who rates Fiat "buy".

Oil & gas ranked among the top sectoral gainers on Europe's benchmark index, which saw its biggest ever monthly rise - 13 per cent - in April.

Galp Energia rose 9.1 per cent, Lundin Petroleum gained 6.1 percent, StatoilHydro added 5.4 per cent and ENI closed 2.9 percent higher. Crude oil prices rose 1.2 per cent to almost $54 a barrel.

Shares in Frontline, the world's largest oil tanker shipping company, rose more than 25 per cent.

Manufacturing activity grew in China and India in April, and declined at its slowest pace in six months in the euro zone, raising hopes that the sharpest economic slump in six decades may have bottomed out. US data showed pending sales of existing homes rose unexpectedly in March.

"The April PMI report still points to a sharp contraction in output but the decline appears to be slowing heading into the second quarter," JPMorgan said in a note on the euro zone PMI.

"The worst of a severe recession may be over," it added.

The European Commission, however, forecast that the economy of the 16-country euro currency zone would shrink 4.0 per cent this year and by 0.1 per cent in 2010, despite what it called some "positive signals" in recent days.

Some equity strategists said the recent stock market rally, which has seen the FTSEurofirst 300 index shoot up more than 30 per cent from its March 9 low point, may soon grind to a halt.

"Even though the economic data could hardly be weaker, the stock markets cling on almost without hesitation to the last few weeks' upward trend," German bank NordLB said.

"We do not think that the data justify such a trend, despite the fact that stock markets tend to be an early indicator of actual economic developments, and are therefore rather sceptical looking at near-term prospects (for equities)," NordLB said.

The DJ Stoxx industrial goods and services index added 3.2 per cent, with Wartsila up 11 per cent, Konecranes up 8.8 percent, Sandvik up 8.4 per cent, ABB up 7.5 per cent and Alstom up 4.8 per cent.

"Positive sentiment has the upper hand. Investor behaviour is driven by hopes of economic recovery," Commerzbank said.

Shares in steelmaker ArcelorMittal rose 12.5 per cent, catching up with strong gains for basic resources stocks in London on Friday, with traders also citing strong appetite for the company's capital increase unveiled last week.

Financials remained in focus in the run-up to Thursday's release of results from the US government's stress test of the country's 19 largest banks.

US bank shares rose - the KBW Bank index was up 5.5 per cent - after analysts said the stress tests would show most would need less new capital than previously feared.

In Europe, Bank of Ireland jumped 18 per cent, Erste Bank put on 9.7 per cent, BNP Paribas rose 3.9 per cent and Danske Bank gained 3.1 per cent.

The DJ Stoxx European banks index reached its highest close since December 10. It has now risen 95 per cent since March 9, and Deutsche Bank strategists said the rally was unlikely to prove sustainable.

"We see many reasons to be negative on Banks and therefore we buy the 'db xtrackers Stoxx600 Banks short'," Deutsche said, referring to an exchange-traded-fund (ETF), whose performance is inverse to that of banks in Europe's top-600 index.

In what looked like a sector rotation in favour of cyclicals out of defensives, health care stocks underperformed, falling 0.3 per cent on the DJ Stoxx sector index. UCB lost 3.2 per cent and Crucell dropped 2.8 per cent.