European shares hit 2-1/2 week high

European shares hit a 2-1/2 week closing high on Tuesday, with appetite for riskier assets boosted by expectations a second aid package for Greece would be agreed, lowering the risk of a near-term debt restructuring. European Union officials met in Vienna to draft a second bailout for highly indebted Greece, with a range of policy steps on the table including debt rollover and bond maturity extensions, sources said.
A report in the Wall Street Journal said Germany is considering dropping plans for an early restructuring of Greek bonds, a further move that could help overcome the impasse over Greece's funding needs. The pan-European FTSEurofirst 300 index of top shares ended 0.8 percent higher at 1,142.18 points, its highest closing level since May 12.
"They want to ensure that there is no restructuring and it is quite clear that they're doing what they can to ensure that things work out in the best possible way for Greece and other indebted eurozone countries," said Mike Lenhoff, chief strategist at Brewin Dolphin. "The easing in the terms of the loan is good for sentiment but the danger is if Ireland comes along and asks for something similar."
Banks added the most points to the index, with the STOXX Europe 600 banking index up 1.1 percent, while Greek lenders rose 10.1 percent. The euro hit a three-week high against the dollar on the back of optimism of an aid package for Greece, but briefly pared gains after a German Parliament member told business newspaper Handelsblatt Greece should leave the eurozone.
Some caution, however, crept into the market in late trading after data showed business activity in the US Midwest grew at a less-than-expected pace and home prices fell back below crisis-era lows in March. Adding to growing concerns over the pace of economic growth in the world's largest economy, consumer confidence slid in May.
Worries about slowing momentum in the global economy were among the reasons that prompted investors to cut their exposure to shares in May for a fourth month in a row, according to Reuters poll, with volatile commodity prices also seen causing a lower equity exposure and an increase in bond holdings.
"For equities to outperform, you need the end of the bull market on bonds, which should not be that far," Alain Bokobza, Societe Generale's head of global asset allocation, said, referring to the end of the United States' second round of quantitative easing in June. "It might be the start of a trend reversal in the bond market and a reallocation into other asset classes, including equities."
Among individual movers, German chemicals group BASF rose 3.8 percent with traders pointing to an increased price target from Goldman Sachs. Wolseley added 3.4 percent after the Sunday Times reported that the plumbing supplies firm has put three of UK businesses up for sale. On the downside, Nokia slid 17.5 percent and hit its lowest level in 13 years after the world's top mobile handset maker dropped key targets.