Retailers help European shares edge up on sales boost

Thu Jan 17, 2013 5:55pm GMT

* FTSEurofirst 300 up 0.5 pct, Euro STOXX 50 gains 0.6 pct

* Carrefour, AB Foods surge after sales figures

* Fall in correlation marks return of stock-picking - C. Suisse

* Natixis, BofA-ML expect rally to continue

By Francesco Canepa

LONDON, Jan 17 (Reuters) - European sales rose on Thursday as upbeat U.S. economic data and encouraging sales figures from retailers Carrefour and Associated British Foods offset losses in the mining sector.

Corporate updates were the main driver on Thursday, with AB Foods, owner of discount retailer Primark, and supermarket Carrefour rising 6.1 percent and 3.2 percent, respectively, in brisk volume after they reported reassuring figures for the end of 2012.

"Investors are starting to judge stocks based on their fundamentals, as opposed to macro factors," Mark Buchanan, director of trading strategy at Credit Suisse, said.

"Correlations and volatility have fallen, which suggests...individual stock picking is becoming fashionable once again."

The average correlation between euro zone blue chips in the Euro STOXX 50 index and implied volatility on the index have fallen sharply since the second half of 2012 as a Euroepan Central Bank pledge to save the euro allayed the spectre of economic disaster in the common currency's area.

The Euro STOXX 50 rose 0.6 percent to 2,718.93 points on Thursday while the pan-European FTSEurofirst 300 index rose 0.5 percent to 1,165.54 points.

The indices extended gains in the afternoon after upbeat economic data from the United States, where the number of new applicants for unemployment benefits fell to a five-year low last week, and groundbreaking for homes rose to the fastest pace in four years last month.

"Today's unexpectedly strong...numbers will reassure markets that the U.S. economy is robust enough to withstand this month's rise in payroll taxes," Dominic Rossi, global chief investment officer for equities, Fidelity Worldwide Investment, said in a note.

"These figures provide a significant tailwind for equities and justify the market's renewed strength."

The data helped basic resources shares, which depend on global economic activity, cut losses in late trade.

The sector, which closed 0.6 percent lower, was the worst performer after miner Rio Tinto recorded a $14 billion writedown.

BRIEF CONSOLIDATION

The FTSEurofirst 300 was still stuck in the 1 percent range that has trapped it for the past week, as the index consolidated 22-month highs, but investors were still expecting new gains ahead.

"This consolidation is healthy to make the uptrend more robust," a trader in Milan said.

The index has risen nearly 23 percent since June as bond-buying programmes by some of the world's' largest central banks have driven down bond yields and pushed investors towards assets offering higher returns, such as equities, despite still negative earnings growth.

"The strength in equities is not about earnings growth, really, it's about liquidity," Yves Maillot, head of European equities at Natixis Asset Management, which has 287 billion euros ($383 billion) of assets under management.

"(One) can't rule out a correction in the short term, but if you look at the market in the past week, it's struggling to pull back a bit after such gains, which tells a lot about inflows."

His views were echoed by strategists at Bank of America Merrill Lynch, who said the rally may need a pause before picking up the pace again.

They flagged that some of the equity markets that led the surge - such as Germany's Dax, which is up just 0.6 percent since Jan. 3 - have started to slow down and recommended watching out for any sign of fatigue in Japanese real estate and small-cap stocks for signs that a pullback may be imminent.

"Bullish sentiment does not guarantee a correction, but the current level of optimism does raise the risk of a pullback in coming weeks," the bank's strategists say in a note.

"Without one, perhaps because investors are unwilling to bet against Great Rotation, we would be tempted to call for a much bigger correction in March or April, especially if a resolution to the U.S. debt ceiling negotiation causes another lurch higher in risk assets."

On a full-year horizon, however, BofA-ML still expected the Euro STOXX 50 to rise around 11 percent to 3,000 points.