Stimulus measures push European shares to new high

European shares hit a new five-year high yesterday after Federal Reserve Chairman Ben Bernanke said the central bank would retain its stimulus measures until the economy improved.

Analysts stayed positive on the stock market’s near-term outlook, saying the recent rally was likely to continue and investors would not be deterred from adding riskier assets such as equities to their portfolios.

The FTSEurofirst 300 index of top European shares closed 0.2 per cent firmer at 1,256.28 points, the highest close in five years.

It is up more than 10 per cent so far this year.

“I don’t think that recent gains are unsustainable as we are still in an environment where the global liquidity backdrop is dominating any other concerns,” Ian Richards, global head of equities strategy at Exane BNP Paribas, said.

“The liquidity support will not be around forever, but presumably the support won’t be withdrawn until economic activities improve.”

Recent data from the world’s biggest economy have been encouraging. Analysts said the US was on a recovery path, but progress had been slow and unemployment was still high.

Bernanke said in a testimony to Congress the Fed’s policy was providing benefits to the economy and prematurely tightening would carry substantial risks.

Liquidity support from central banks has boosted shares globally, with the US S&P 500 and Germany’s DAX hitting all-time peaks and UK’s FTSE 100 flirting with a record high level.

“We favour European companies with a strong exposure to the US economy, where growth is picking up,” Philippe Lecoq, head of European equities at Edmond de Rothschild Asset Management, said, adding the stocks well placed to benefit from US growth included Wolseley, Sage and Schneider.

Those sectors which generally derive strength from an improvement in liquidity and economic activities were in demand, with the STOXX Europe 600 Basic Resources index rising 0.7 per cent and European banks gaining 0.6 per cent.

The market’s technical outlook remained bullish, with the blue chip Euro STOXX 50 index seen gaining further after rising 0.5 per cent to 2,835.01 points yesterday.

The index’s 14-day relative strength index (RSI) crossed 70, a level considered as technically “overbought” and which often leads to a pullback, but analysts were not concerned.

“Overbought in itself is not a sell signal. It tells you about the strength of the price movement and that is bullish at the moment.

“There could be a setback of two to three per cent decline, but that would be a buying opportunity,” Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking, said.

Among sharp movers, German retailer Metro surged more than 10 per cent after Morgan Stanley upgraded the stock to ‘overweight’ from ‘equal-weight’.