China recovery hopes lift European shares

European shares advanced yesterday as signs of economic recovery in China fuelled a rally in mining, construction and energy stocks.

The FTSEurofirst 300 index of top European shares closed four per cent higher at 696.23 points, ending a three-session losing streak which saw the benchmark sink to a 12-year-low close last Tuesday.

The DJ EuroSTOXX50 index climbed 4.2 per cent and in the broader top-600 universe, rising stocks led decliners by five to one.

"We have several reasons to believe that stocks are bottoming," said Joost van Leenders, strategist at Fortis Investments.

"Markets have fallen into severely oversold territory and sentiment is extremely negative," he said.

"Secondly, while stocks have set new lows, credit markets have held well above their November lows. Thirdly, expectations about the economy and profits have become more bearish and are more in line with reality. This should limit the number of negative surprises," he added.

The basic resources sector index rose 12.6 per cent, lifted by miners Rio Tinto, up 14 per cent, and BHP Billiton, up 12.9 per cent, on the back of the price of copper soaring nearly seven per cent to its highest in more than three months.

Steel maker ArcelorMittal gained 12.4 per cent. Citigroup upgraded the stock to "hold" from "sell" and ICAP rated ArcelorMittal "buy", describing it as the "leader of the pack" and arguing it would gain from infrastructure spend in China.

The Chinese purchasing managers' index rose to 49.0 last February - the highest level in five months and the third consecutive rise.

"Metal prices... are benefiting from the outlook that demand in China could recover soon," Commerzbank analyst Eugen Weinberg said.

"Prime Minister Wen Jiabao may present new measures to stimulate the economy at the annual meeting of the National People's Congress starting tomorrow," he said.

News that China will increase spending in areas such as infrastructure lifted construction and building materials, up 8.3 per cent on the sector index, led by Irish CRH, which shot up 16 per cent to a three-week high.

Crude oil prices rose six per cent, supporting European energy stocks such as Total, up 8.9 per cent, StatoilHydro, up 7.7 per cent and Royal Dutch Shell, up 6.3 per cent.

Jesse Wang, chief risk officer at China's $200 billion sovereign wealth fund, CIC, saw investment opportunities in sectors such as basic necessities, resources and manufacturing.

While data out of China drew cheers, the latest economic figures from Europe and the United States provided scant solace.

Across Europe yesterday, Britain's FTSE rose 3.8 per cent, Germany's DAX added 5.4 per cent and the French CAC 40 put on 4.7 per cent.