European shares lifted by US data

European shares advanced on Thursday as upbeat data from the United States helped fuel a low-volume rally in the afternoon, although volatility also rose as investors hedged against lingering uncertainty in the eurozone. The Chicago PMI, a measure of financial activity and gauge of US business conditions, beat estimates, and pending home sales rose by much more than expected in November.
While the readings point to improvement in the US economic environment, which would support European corporate earnings, continued high borrowing costs at an earlier auction of Italian debt showed the market remains sceptical on a solution to the eurozone debt crisis.
The FTSEurofirst 300 index of top European shares closed up 1 percent at 992.78 points, although trading was once again light at one-third of its 90-day average. However, the Euro Stoxx volatility index, based on sell- and buy-options on the Euro STOXX 50 and which traditionally has an inverse correlation with the index, rose 1.2 percent as investors took protection against a possible escalation in the euro crisis at the start of next year, when the sovereign and corporate refinancing cycle is set to resume.
In a sign the underlying sentiment is still one of caution, defensive sectors such as utilities and telecoms were among the top performers, rising 1.5 percent and 1.3 percent respectively, as investors preferred yield plays to stocks heavily dependent on the economic cycle, such as personal & household goods, which rose by a mere 0.5 percent.
Italian banks, which own the bulk of the country's debt, mostly underperformed after Italy saw the yield on its 10-year notes remain perilously close to 7 percent, a level seen as unstustainable in the long run, at an auction on Thursday. UniCredit fell 1.5 percent as uncertainty over the pricing of the bank's capital increase added to sovereign-related risk.