European stocks likely to make better progress

European shares may rally next week as recent concerns on rising inflation and interest rates fade, and merger and acquisition activity continues to burgeon. Next week's thin corporate calendar on both sides of the Atlantic will keep the outlook for interest rates at the forefront of investors' concerns, but recent signs that inflation is in check should provide some relief.
On the European economic front, the focus will be on the ZEW economic sentiment index on Tuesday and the Ifo index on business climate on Friday. "I would not be surprised to see this recovery on stock markets continuing, albeit certainly not to the same extent, because for that we would need expectations that central bank policy is cooling down, and that's not what we're seeing," said Franz Wenzel, a strategist at AXA Investment Managers in Paris.
The pan-European FTSEurofirst 300 benchmark index extended its gains on Friday after US CPI figures were released. By 1530 GMT, Europe's benchmark index was up 1.2 percent. It gained about 3.5 percent on the week, reversing the previous week's sell-off - its worst week since early March as interest rates and inflation returned to haunt investors - and seems now ready to revisit 6-1/2-year highs touched in early June. "Inflation is in check, particularly in the euro zone, and it will remain under control," said Wenzel.
Robust economic growth and persistent inflation have prompted central banks across Europe to move down the path toward higher interest rates. The ECB raised its key interest rate last week by a quarter of a percentage point to 4 percent and said it would continue to monitor inflation closely.
Analysts said rising rates could cool down Europe's M&A spree, which has fuelled the recent rally and brought the market to historical highs. But Wenzel said it may still take a while before higher rates end the market's bull ride.
"Interest rates are higher now, but the fundamentals for equities are still intact: macro- and earnings-wise, things are still rock solid. There is no worry coming from that side," he said.
"At these levels rates are not such a hurdle that they could derail the stock market train, and on top we see that global liquidity is still ample." In the United States, a number of stronger-than-expected readings of the US economy in the last several weeks, including robust retail sales, have lifted growth expectations and fuelled some concerns about inflation.
On the European corporate front, the spotlight will be on first-half trading statements from Cadbury Schweppes and Standard Chartered, while Carnival and H&M are due to report first-half results. Among the few US companies reporting quarterly results are retailers Best Buy and Circuit City Stores, as well as Fedex Corp, Morgan Stanley and H&R Block.
In Europe, the economic focus will on Germany, with the ZEW economic sentiment index expected on Tuesday, German monthly producer prices figures on Wednesday and the Ifo index on business climate on Friday. Investors will also keep an eye on US housing starts data for May on Tuesday and weekly jobless claims on Thursday.