Europe: M&A, banks brighten lacklustre European stock markets

[LONDON] A European recovery rally dissipated on Thursday with benchmarks across the region weighed down by commodities and technology stocks, while acquisition approaches sent Danish telecoms group TDC and Swiss insurer Swiss Re flying.

Europe's Stoxx 600 share index fell 0.5 per cent by mid-morning, pulled lower by a 1.5 per cent decline in basic resources, and weaker industrials stocks.

The index was still down 2.8 per cent year-to-date after equities worldwide took a battering this week. The previous two sessions saw the heaviest volumes traded on the Stoxx 600 in more than seven months.

Financials limited the damage, with euro zone banks gaining 0.4 per cent after strong earnings from UniCredit and Societe Generale.

Merger and acquisition activity drove the top European gainers.

Danish telecoms company TDC led the Stoxx 600, shooting up 16.3 per cent and on track for its best day since June 2007, after it rejected a takeover approach from Macquarie and three Danish pension funds.

Swiss Re shares jumped 4.6 per cent after the reinsurer said it was in talks with Japan's SoftBank to sell a minority stake.

Strong results also boosted some stocks as investors' focus turned back to the European earnings season.

"At the end of the day for us, the question was does this correction change the earnings picture or the economic picture?

At this point, no it doesn't," said Pierre Bose, head of European strategy at Credit Suisse.

Societe Generale shares rose 3.9 per cent after the bank reported forecast-beating results despite a quarterly drop in profits.

"French retail revenues better than guidance, and good numbers in markets with equity derivatives back to normal," said Jefferies analysts.

Italy's UniCredit rose 3 per cent after profit topped forecasts, and Banco BPM led Italian stocks with a 4.1 per cent gain after the bank raised its target for shedding bad loans.

Norwegian consumer goods firm Orkla gained 5.8 per cent after its fourth-quarter earnings beat forecasts.

Schibsted, however, fell 5.5 per cent after traders said its third-quarter earnings missed forecasts.

After this week's sharp correction, valuations of the Stoxx 600 have fallen back below their one-year average.

"It's not cheap, but it's much closer to fair value," said Credit Suisse's Mr Bose.

"The market was moving close to vertically for the first few weeks of this year, and absolute valuation has been a bit expensive for the past 18 months. From that point of view the correction that we've had is actually extremely helpful."

But the market was still warily eyeing volatility levels which partly determine how asset allocators measure the levels of risk they can take on.

"If volatility remains higher, the one thing that does change for investors everywhere is the risk/reward ratio," said Mr Bose.

REUTERS