European shares edge up ahead of ECB statement

LONDON: European stocks edged up on Thursday, extending a sharp rally from the previous session, as investors became more optimistic that policymakers would act to avert recession and tackle the euro zone debt crisis.

As expected the European Central Bank held interest rates at 1.5 percent. Investors awaited the ECB's press conference at 1230 GMT, for pointers on policy, especially bond buying.

At 1158 GMT, the FTSEurofirst 300 index of top European shares was up 0.3 percent at 934.52 points. It had been as high as 941.65 earlier.

The index gained 3.1 percent on Wednesday, having hit a two-year closing low on Tuesday.

The index is down more than 16 percent in 2011, as investors cut their exposure to risky assets such as stocks following an escalation of the euro zone debt crisis, and weak economic data from major economies that have sparked concern they may fall back into recession.

The ECB is expected to signal a change in policy direction on Thursday, halting an interest-rate rise cycle just five months after it started as the euro zone debt crisis weighs on the economy.

US President Barack Obama will make a speech to Congress after the close of European markets, during which he is expected to propose $300 billion in tax cuts and government spending as part of a job-creating package.

"The market is getting more optimistic about some kind of policy response. (For example) ... There's talk that Obama will announce an infrastructure package. These things on their own are fairly small, but together they add up," said Daniel McCormack, equity strategist at Macquarie in London.

As expected, the Bank of England held its key interest rate at a record low of 0.5 percent, where it has been for two and a half years.

Beaten-down bank shares rallied for a second day. The STOXX Europe 600 Banking Index rose 1.2 percent, though it is still down more than 31 percent in 2011.

"A bank like BNP Paribas trades at four times expected earnings for 2012, while in our worst-case scenario for next year, we get a price-to-earnings ratio of 7-8... At these levels, European stocks are pricing in the breakup of the euro zone," said Regis Begue, head of equities at Lazard Freres Gestion, which has 11 billion euros ($15.4 billion) under management. BNP Paribas rose 2.6 percent.

Deutsche Bank rose 2.8 percent after comments from its chief executive maintaining 2011 operating profit targets.

But Greek banks fell 7.5 percent. The Greek economy remained deep in recession in the second quarter, data showed on Thursday.

Anger at Greece's failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals.

Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC40 rose between 0.2 and 0.3 percent.

Some strategists said low valuations would not necessarily attract investors back into equities.

"You're going to see some downgrades. Analysts haven't cut their numbers nearly enough. There may be a little more downside to equity markets, though multiples have troughed," McCormack said.

Copyright Reuters, 2011