European shares bounced to a fresh four-and-a-half-year high yesterday helped by investors bidding up stocks including Lloyds TSB as takeover speculation swirled, and record metals prices buoyed heavyweight miners.
Upbeat earnings from companies such as BSkyB helped the positive tone, but drug giant Roche was swiftly punished on concerns it may not be able to sustain profit growth.
Europe's FTSEurofirst 300 index ended up one per cent at 1,333.32 points, its highest close since August 2001.
"The market's not that stretched on valuations, it's a bit frothy because of the takeover activity but at the end of the day companies are quite cheap," said Mark Bon, fund manager at Canada Life.
"Results are coming in in line or slightly ahead, if we do see a broad economic recovery in Europe, people's estimates can still be revised up quite a bit," said Bon.
With the rumour mill in full swing, Lloyds jumped five per cent on fresh bid speculation, with Spain's BBVA identified as a possible predator. However, Lloyds declined to comment and sources familiar with the situation said the bank was not currently in takeover talks.
Elsewhere, steelmaker Salzgitter rose 4.6 per cent as investors guessed ThyssenKrupp could be plotting a bid, while Dutch retailer Ahold rose 4.6 per cent with investors citing talk of takeover interest from US private investor KKR and Tesco.
Sweden's Electrolux rose 3.5 per cent despite South Korea's LG Electronics pouring water on bid talk.
Roche ended down 3.6 per cent on its slightly cautious outlook after reporting soaring Tamiflu sales due to fears of a bird flu epidemic propelled its drug revenues last year.
"People are concerned that the earnings guidance is not as strong as it could have been. It went up initially on the strong numbers. People are also now not seeing any near-term catalysts to the shares," a trader said.
Also in earnings news, satellite broadcaster BSkyB rose 3.3 per cent as it reported a 13.7 per cent rise in first-half profit after adding a more-than-expected 215,000 customers to its pay-TV service in its second quarter.
"We had expected earnings to be a positive trigger this year and this is taking place," said ABN AMRO strategist Rolf Elgeti.
"In Europe, most companies are surprising to the upside. We have very solid company data and nothing wrong on the macroeconomic side," he said.
Miners rose, with BHP Billiton adding 1.1 per cent, Rio Tinto gaining 1.7 per cent and Antofagasta 1.6 per cent after copper hit an all-time high.
Telecoms was among the weakest sectors, as stocks extended their recent slide, with BT Group and France Telecom down around 0.4 per cent.
Elsewhere, Austria's Raiffeisen International Bank-Holding topped gainers with a 6.8 per cent rise after saying it would pay $550 million to buy Russia's Impexbank, making it the largest foreign player in the fast-growing Russian market.