London: European shares rose in early trade on Wednesday, led by banks and tracking gains in overnight markets after US consumer confidence data fuelled hopes of an economic recovery.
At 1:38pm, the FTSEurofirst 300 index of top European shares was up 0.4% at 868.50 points. The index has risen 5% in May and is set for its third straight month of gains, its best winning streak in two years.
Banks were broadly higher, with UBS, Royal Bank of Scotland . Credit Agricole, Societe Generale, Lloyds and HSBC adding 1.4 to 3.3%.
Analysts said equities gains were fuelled by central banks pumping liquidity into the system, and were set to continue.
“Liquidity rallies can last quite a while, perhaps more than a year - we see European shares gaining 10% (overall) this year,” said Franz Wenzel, strategist at AXA Investment Managers in Paris.
“Excess liquidity is more in favour of riskier asset classes like equities -- asset classes benefit first before it can lead to inflation,” he said.
Among top losers on the FTSEurofirst 300 was Britain’s Tullow Oil, which fell 1.5% after saying it had plugged and abandoned a well in Uganda.
Across Europe, Britain’s FTSE 100 was up 0.4%, Germany’s DAX was up 0.5% and France’s CAC was up 0.5%. Wall Street futures were around 0.2% higher.
Defensives out of favour
The FTSEurofirst 300 has risen nearly 35% since 9 March, when it hit the lowest point in its 12-year lifetime, and is up 4.4% so far this year.
The surge has been driven by improving macroeconomic data, better than expected results from some top companies and a stabilisation in banks.
It has also lifted cyclical stocks well above defensives. Cyclicals rise when hopes of economic recovery gain ground, while investors seek defensives in times of strife.
In the year to date the DJ Stoxx European basic resources sector index has surged nearly 40 percent, while the banks index has risen 22%.
On the other hand the DJ Stoxx European food and beverage index, a defensive sector, has gained just 2.3% while healthcare stocks, utilities and telecoms are the three worst performing sectors, down 6.1 to 8.4%.
On Wednesday, drug stocks slipped again, with Novartis, Sanofi-Aventis and GlaxoSmithKline ,GSK.L down 0.4-0.7%.
Macroeconomic data continued to be broadly positive. After US consumer confidence surprised investors on Tuesday, hitting its highest level in eight, Japanese exports showed modest signs of recovery, figures for April showed on Wednesday.
“It’s a sensible conclusion that we have avoided a depression, and while we’re admittedly in a deep recession the terrain we are walking on has stabilised and the macroeconomic data are producing rays of hope for the second half,” said AXA’s Wenzel.