European shares climb after US raises hope on fiscal deal

Last Updated: Fri, Nov 30, 2012 19:00 hrs

* FTSEurofirst up 0.8 percent

* U.S. lawmaker boost expectations of fiscal deal

* Miners rise as near-term growth risks fade

* Kingfisher profits hurt by UK, French performance

By David Brett

LONDON, Nov 29 (Reuters) - European shares rose on Thursday as rising expectations that U.S. lawmakers will strike a deal to avoid growth-sapping austerity measures lifted the potential for a year-end equity market rally.

By 1048 GMT, the FTSEurofirst 300 was up 9.13 points, or 0.8 percent at 1,118.40, tracking a rise overnight in U.S. stocks and with Wall Street poised to extend gains when it opens later on Thursday.

On Thursday, President Barack Obama and House of Representatives Speaker John Boehner signaled intent that the Republicans and the White House could soon strike a deal to avoid a $600 billion 'fiscal cliff' of budget cuts and tax rises due to come into effect next year.

"There seems to be a recognition across the two parties that there needs to be some good news by year end, which is why markets have started rallying," said Stewart Richardson, chief investment officer at RMG.

Banking and resources shares were among the biggest gainers although buying across the market was cautious given that a U.S. deal was still far from assured.

European shares have now gained 4 percent in the last seven trading days, bouncing back from near four-month lows in the middle of November and nearing the top of their recent range.

"You could see the rally last into early 2013, but at some point the (economic) numbers are not going to lie and the long-term fiscal issues that the U.S. is facing are going to haunt this current administration before it ends in four years' time," Richardson said.

For the time being investors are focusing on short-term good news out of the United States and the euro zone.

That has been reflected in other asset classes too: Italy's 10-year bond yield hit its lowest in two years at an auction on Thursday, benefiting from a deal this week on Greek debt, which eased near-term risks for struggling euro zone states.

Fading near-term risks also encouraged investors to buy into equities recently dragged down by global growth worries.

Basic resource stocks, which would be directly impacted by falling demand as a result of painful austerity measures in the U.S., gained 2.3 percent, although the sector remains down 4.4 percent in 2012, reflecting longer-term worries.

"Risk assets are trading today as though a solution in the U.S. might be imminent, but as we have seen before despite the talk these things can go to the wire so expect a bumpy ride," a London-based trader said.


Banks, which tend to perform better when the outlook for the broader economy brightens, added 1.4 percent, although Japanese house Nomura recommended avoiding some euro zone periphery lenders.

Nomura favours banks including the UK's Standard Chartered and HSBC, as well as other non-euro zone institutions Swedbank, DNB and UBS .

British bank shares, however, trimmed gains after the Bank of England stepped up its call for them to raise capital, saying banks may not have enough in reserve to protect against problems ahead, potentially weighing further on earnings growth.

European banks reported a 4.6 percent contraction in earnings year-on-year in the third-quarter, according to Thomson Reuters Starmine data.

Broader growth remains a challenge for companies, with central bank stimulus doing little so far to help revive European economies.

Poor economic growth in Britain and France weighed on Kingfisher, Europe's No. 1 home improvements retailer, which saw third-quarter profit fall 6 percent, also hurt by unfavourable foreign exchange movements. Its shares fell 1.4 percent.

Analysts have cut their earnings' forecasts for European companies by an average of 4.9 percent for the fourth quarter in the last 30 days, according to Starmine data.

Industry's reluctance to invest next year bodes poorly for a quick recovery from recession in the euro zone.

And German unemployment rose for the eighth month running, suggesting domestic demand might not be able to compensate for weakening exports and drive growth in Europe's largest economy.

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