European shares hit seven-month highs yesterday as utility E.ON rallied, and cars and consumer goods reached new peaks on bets of economic recovery, despite powerhouse Germany tipping into recession.
E.ON, Europe's second-biggest listed utility, pleased investors with first-half profits, pledged strong mid-term earnings and unveiled plans to prepare for tougher competition.
E.ON shares rose 3.7 per cent to €46.96, bolstering the sector and pushing French peer Veolia up six per cent to €17.26.
On the downside, Allianz disappointed the market with a set of poor underlying results and a sluggish turnaround at its Dresdner Bank unit, but said it hopes to return to profit in the full year. The stock fell 0.5 per cent to €88.20.
By 1533 GMT, the FTSE Eurotop 300 index of leading European blue chips was up 1.39 per cent at 891.24 points after hitting its highest level since January 7.
Advancing stocks outpaced decliners by more than four-to-one in moderate dealings.
With Frankfurt still trading, the Eurotop 300 was heading for its best close since mid-December, and was up four per cent for the year after a 30.5 per cent comeback from March's six-year lows. Fund managers said the recovery being factored into prices could yet disappoint.
"These gains are not supported by fundamentals, which are still weak, with a few European countries in recession, such as Italy, Germany and Holland, while others have very small growth," said Lex Werkheim of Eureffect asset management in Amsterdam.
Germany, Europe's biggest economy shrank 0.1 per cent in the second quarter as the strong euro hit exports.
The European Commission said recession in Italy and Germany caused stagnation in the euro zone in the second quarter of the year, but it insisted the picture would brighten.
"The market gains are more based on hope, betting on economic recovery, which is why the valuation of cyclicals are going up," Mr Werkheim said.
The DJ Stoxx indices of economy-sensitive consumer cyclicals and autos hit new 2003 peaks.
"If real recovery takes place, you are going to see some pretty nice rallies, even from these levels, but the real scenario is probably one of very slow growth, and we won't see much from the stock market. It will all be down to sector rotation."
Analysts said rising bond yields remain a worry as they could hinder economic recovery by making money more expensive for companies and consumers to borrow.
The European earnings season saw a late spurt with several German firms reporting, including Deutsche Telekom.
Europe's biggest telecom carrier, which is saddled with €53 billion of debt, unveiled better-than-expected quarterly profits and said it would resume dividend payments in its next financial year. The stock rose one per cent to €13.73, near to its best level for the year.
German steel group ThyssenKrupp fell 4.7 per cent to €11.20 after saying its third-quarter pre-tax profit fell by almost a third due to weak demand with no quick relief in sight.
Investors rewarded German industrial gas and engineering group Linde, which reported an anticipated lower first-half core profit, but kept its cautiously optimistic outlook guidance. The stock rose 4.7 per cent to €37.05.
Dutch financial group ING reported a market forecast beating 15 per cent rise in second-quarter core profit, sending its shares up 3.7 per cent to €18.38 and a new high for 2003.
Dutch food group Numico, whose shares rose 9.6 per cent to €15.90 as investors looked past a first-half loss to the group's upbeat outlook.
Most of Europe's top bourses gained well over one per cent, while the DJ Euro Stoxx 50 index of euro zone blue chips advanced 1.7 per cent to €2,541.
Wall Street was also higher, with the Dow Jones industrial average up 0.38 per cent at 9,307 points, while the tech-laden Nasdaq Composite rose 0.3 per cent to 1,691 points, both helped by more steady US economic data.