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European shares resume uptrend; ECB in focus

Published 07/07/2011, 04:42 AM
Updated 07/07/2011, 04:48 AM
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* FTSEurofirst 300 up 0.3 percent

* ECB comments on debt, monetary policy eyed

* Solvay a top gainer, ThyssenKrupp leads fallers

* For more on stock moves, click on

By Simon Jessop

LONDON, July 7 (Reuters) - European shares rose on Thursday, tracking U.S. markets higher and reversing the previous session's fall, with trade seen thin ahead of the European Central Bank's rate-setting meeting.

While the ECB was widely expected to raise interest rates by 0.25 point, markets will focus on the post-meeting press conference for fresh clues as to its handling of monetary policy and the regional debt crisis.

Investors will look "for further signs of hawkishness and clarification on how the ECB will handle S&P's decision that the French and German restructuring plan would constitute a default," Jonathan Sudaria, a trader at Capital Spreads said.

Standard & Poor's said earlier this week it would likely classify a French plan to involve the private sector in a rollover of Greek debt as a default, prompting a fresh meeting of leading lenders in Paris on Wednesday.

The latest test of market sentiment for peripheral debt will come later in the session when Madrid returns to issue fresh three and five-year bonds.

Integrated oils led a broad-based rise, adding 0.48 point to the index and buoyed by a 1 percent gain in the value of regional benchmark Brent crude , while Belgian chemicals company Solvay was among the top individual gainers.

Its stock rose 2.3 percent in traded volumes of 60 percent of the 30-day average, buoyed by a UBS rating hike to "buy" with a target price increase to 130 euros from 88 euros.

Rate rises are often bad for equities, partly because companies face higher funding costs, although having the confidence to raise rates during a fragile economic recovery can also be taken as a positive.

For Valentijn van Nieuwenhuijzen, head of strategy and chief economist at ING Investment Management, the market would not react to the rate announcement itself as it was priced in, and he did not expect to change his investment strategy.

"We do not expect the ECB to come out very differently than it has done over the last two weeks," he said.

"Although we are bullishly tilted, with overweights in commodities and real estate, we also hold long positions in Treasuries and have relatively low risk on. We want to see a bit more confirmation on the sovereign crisis and the cyclical outlook for the second half."

The FTSEurofirst 300 index of leading European stocks was up 0.3 percent at 1,122.15 by 0816 GMT after falling 0.3 percent in the previous session to snap a seven-session winning streak.

Early gains were reflected in a rise in risk appetite as equity market volatility in Europe, as measured by the Euro STOXX 50 volatility index , fell 0.8 percent.

Caution around the euro zone debt crisis ahead of the ECB meeting kept some peripheral lenders on the back foot after falls in the previous session on Moody's four-notch downgrade of Portuguese credit, although the broader sector rose.

The STOXX Europe 600 index was up 0.2 percent in early trade, led by HSBC , up 0.4 percent, although Spanish heavyweight Santander was down 0.3 percent.

While banks had underperformed recently, on the back of the euro zone debt woes, Societe Generale said in a note that French and German exposure to Greece, Ireland and Portugal "appear manageable given their capital and reserves".

Leading all stocks on the downside was German steelmaker ThyssenKrupp , which fell 5.3 percent on its 1.7 billion euro share sale, in volumes more than 2-1/2 times their 30-day average.

INDICATORS EYED

A study of client flows by UBS suggested long-only investors have turned steady buyers of European equities for the first time since February, although hedge funds have been net sellers over the past month.

"After the ISM new orders peaked on April 1, we saw net selling of cyclicals for 8 out of 12 weeks. And since April cyclicals have underperformed by 8 percent. Last week saw investors turn large net buyers of cyclicals," UBS strategist Nick Nelson said in the note.

The media sector has seen the biggest net buying in the past four weeks, followed by chemicals, while net selling in the mining sector has slowed after net outflows hit a five-year high in April.

Investors have also become more neutral between large caps and small- and mid-caps after large net buying of big cap stocks in the past few months, UBS said.

U.S. private sector jobs data, due out on Thursday, will give a fresh clue to the health of the recovery in the United States ahead of the release of non-farm payrolls data on Friday. (Additional reporting by Dominic Lau; Editing by Dan Lalor)

============================================================ For rolling updates on what is moving European shares please click on ============================================================ For pan-Europeanmarket data and news, click on codes in brackets: European Equities speed guide................... FTSEurofirst 300 index.............................. STOXX Europe index.................................. Top 10 STOXX sectors........................... Top 10 EUROSTOXX sectors...................... Top 10 Eurofirst 300 sectors................... Top 25 European pct gainers....................... Top 25 European pct losers........................

Main stock markets: Dow Jones............... Wall Street report ..... Nikkei 225............. Tokyo report............ FTSE 100............... London report........... Xetra DAX............. CAC-40............... World Indices.....................................<0#.INDEX> Reuters survey of world bourse outlook......... Western European IPO diary......................... European Asset Allocation........................ Reuters News at a Glance: Equities................. Main currency report:.................................

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