European shares bounced to their highest close in almost six years yesterday, boosted by gains in mining and banking stocks, while merger speculation lent support in the first session of the new year.
Among the biggest gainers, Germany's Metro rallied despite a major shareholder denying talk it was buying shares on the market, while Vodafone rose after a report suggested the mobile giant was less likely to acquire Hutchison Essar.
"It looks like people are in a state of euphoria in the first trading day of the year, so I guess it can cool down a bit without being negative," said Jan Leroy, fund manager at Petercam Asset Management.
"A lot of people are still on their holidays so a lack of volumes is driving prices higher."
The FTSEurofirst 300 index of top European shares, which gained 16 per cent in 2006, ended up 1.2 per cent at 1,501.43 points, its highest close since February 2001.
Around Europe, London's FTSE 100 index added 1.5 per cent to its highest since January 2001, while Frankfurt's DAX rose 1.3 per cent to its highest since February 2001. Paris's CAC 40 added 1.4 per cent.
Trading volumes were thin as many market players were still on holiday and US stock markets were closed for a national day of mourning for former President Gerald Ford who died last week.
European equity markets were widely expected to climb for a fifth consecutive year in 2007, but strategists warned that slowing earnings growth could cap rises in equity returns.
"We think European equity markets will rise again over the course of 2007. Our forecast suggests a total return of 14 per cent," said Ian Scott, strategist at Lehman Brothers.
"While we foresee headwinds of declining earnings growth, we believe that favourable valuations of equities relative to other asset classes, and supportive fund flows, will provide scope for further outperformance."
Miners led yesterday's gains, boosted by stronger gold prices and renewed optimism about demand for base metals, driven by upbeat growth in countries such as China.
BHP Billiton rallied 2.9 per cent, while Anglo American gained 2.5 per cent and Rio Tinto rose 1.4 per cent.
Steelmakers were also buoyant, with ThyssenKrupp up 2.8 per cent after Harris Steel agreed to a takeover offer from Nucor.
Banking stocks firmed, with BNP Paribas, up 2.5 per cent after the French bank was France's top M&A adviser in 2006 for the second year running, a report by financial newspaper L'Agefi said.
Insurer AXA added 2.2 per cent after its chief executive told a German magazine it was targeting cost savings of around 10 per cent in its German operations by the end of 2008, mainly via job cuts.
Among telecom stocks, Vodafone added 1.6 per cent after the Financial Times said India's Essar group had tied up financing for a potential bid for the two-thirds of Hutchison Essar it does not own - sparking speculation of no rival offer from Vodafone.