London: European shares advanced for a sixth straight session and closed at a three-week high on Tuesday after impressive results from some major US companies raised hopes for a strong regional quarterly earnings season.
Sentiment was also boosted by a successful Greek treasury bill auction, the country’s first debt sale since a massive emergency loan backstop from the European Union and International Monetary Fund was agreed in May.
As a result of the improving sentiment, the VDAX-NEW volatility index hit 11-month lows. The lower the index, which is based on sell and buy options on Frankfurt’s top-30 stocks, the higher the market’s desire to take risk.
The FTSEurofirst 300 index of top European shares ended 1.9% firmer at 1,045.47 points, the highest close since 22 June. It is up 8% since hitting a low in early July on euro zone debt fears and concern over bank finances.
US aluminium major Alcoa, the first Dow component to report, posted better-than-expected second-quarter earnings late on Monday, raising hopes of strong results for other firms. US rail company CSX Corp said its profit rose 36% in the second quarter, beating analysts’ expectations.
“Alcoa is seen as a bellwether and naturally something that large will give an overview of the current conditions,” said Richard Greenwood, fund manager at Bedlam Asset Management.
“But I expect volatility to continue and see a fight between the undeniable sovereign pressures and fiscal tightening and the fact that corporates are generally cash rich and reporting higher margins.”
Investors awaited results from US chip giant Intel after the Wall Street close, while bellwethers such as Google, JPMorgan, Bank of America and General Electric were set to announce results this week.
“Those upbeat earnings from Alcoa last night certainly seem to have set the pace amongst equity traders who once again seem convinced that this latest rally still has legs,” Will Hedden, senior sales trader at IG Index, said.
European banks topped the gainers list after the Greek auction and as worries over the sector’s stress tests moved to the back burner. National Bank of Greece, Barclays, Dexia and Standard Chartered rose 2.2%-5.8%.
The European Union is set to announce on 23 July how its banks would fare under further adverse conditions, including a deeper fall in value of sovereign bonds, in a bid to boost market confidence damaged by the Greek sovereign debt crisis.
Greece passed its first borrowing test since a giant EU/IMF funding deal in May and easily sold €1.625 billion ($2.03 billion) of 6-month T-bills.
Elsewhere, sources told Reuters that preliminary results showed all of the German banks tested in the European stress test were on track to pass, including the regional Landesbanken.
Autos race ahead
Automobile stocks also received investors’ attention after Germany’s BMW raised its 2010 pretax profit and sales outlook, citing better-than-expected earnings at its automotive business and buoyant luxury car markets.
BMW and rival Daimler surged 8.3% and 5.4%, respectively, while Volkswagen, Peugeot and Renault rose 2.8% to 5.3%.
The Euro STOXX 50, the euro zone’s blue-chip index, rose 1.9% at 2,737.59 points, flirting with a key resistance level of 2,737.62 — the 50% retracement of the index’s fall from its April high to its May low.
“Downtrend signals have abated, disrupted by the start of the earnings season. But there aren’t uptrend signals either, and volumes are ridiculously low, so it’s better not to read too much into this rebound.” said IG Markets analyst Vincent Ganne.
Volume on the FTSEurofirst 300 represented 71% of the index’s 90-day average daily volume.
BP rose 2.9% on optimism the Gulf of Mexico oil spill could soon be contained. It prepared to test a new cap on its runaway well and said its plans to sell non-core assets were moving forward.
Across Europe, UK’s FTSE 100, Germany’s DAX, France’s CAC 40 , Spain’s IBEX 35,and Italy’s FTSE MIB rose 1.6% to 2%. Portugal’s PSI 20 was up just 0.1% as ratings firm Moody’s cut Portugal’s rating to A1 with a stable outlook.