European shares extend rally

European shares were higher this morning, extending a rally into a fourth day as speculation grew that US Federal Reserve chairman Ben Bernanke would announce stimulus measures for the struggling US economy tomorrow.

Corporate results that beat forecasts also helped sentiment.

The heavyweight European banking sector, down 29 per cent this year on worries about its exposure to the euro zone debt crisis, rose 1.7 per cent.

French bank Credit Agricole rose 6.4 per cent after it posted better than expected quarterly earnings, weighed by well-flagged losses in Greece.

Raiffeisen Bank International rose 4.5 per cent after the Vienna-listed emerging European lender reported second-quarter results that beat expectations.

Other banks to gain included Royal Bank of Scotland and Barclays, up 6.6 per cent and 5.2 per cent respectively after recent weakness.

In Dublin, shares in Bank of Ireland were unchanged at 8.9 cent, and Irish Life and Permanent's stock was also flat. AIB lost 1.8 per cent to trade at 5.5 cent shortly before 10am.

The overall Iseq index was 0.7 per cent higher, at 2488.11.

The FTSEurofirst 300 index of top European shares was up 0.9 per cent at 944.79 points at 9.16am, after rising 1.4 per cent yesterday. It was still down 15 per cent in 2011.

Strategists said some of the rally was due to short covering.

"Everyone is waiting to see what comes of the Wyoming meeting. I would be uncomfortable being aggressively short going into the weekend. And corporate results don't look too bad." said Andy Lynch, fund manager at Schroders, which manages £197 billion.

"If the US numbers come out in line with what was implied by the Philly Fed number (which showed a sharp contraction in manufacturing activity) then it is not going to get better anytime soon. But if that was an (aberration), then we probably can sustain a rally."

Recent weakness has made stocks look cheap. Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a one-year forward price-to-earnings of nine, against a 10-year average of more than 13.

While investors are worried the US economy may slip into recession, they are not convinced that Fed chairman Ben Bernanke was ready to signal another bond-buying programme when he addresses a central bank conference tomorrow in Jackson Hole, Wyoming.

"The market has got very excited. I do not think there will be quantitative easing, but there could be some sort of stimulus measures ... to help create jobs," said Justin Urquhart Stewart, director at Seven Investment Management.

"The good thing is that you can look at the corporates, some of which offer very good value. And the bad news is out there. There is no reason to think the market will fall significantly further."

Across Europe, Britain's FTSE 100 was up 0.4 per cent, Germany's DAX rose 0.9 per cent and France's CAC40 rose 1.1 per cent.

Among other individual movers, Diageo rose 4 per cent, after the world's biggest spirits group reported full-year results ahead of forecasts, leading Shore Capital to repeat its "buy" rating.

However, Dutch grocer Ahold fell 4.3 per cent after missing second-quarter profit forecasts, due in part to the difficulty of passing on higher food costs to cash-strapped shoppers.

Economic news continued to raise concern for investors.

German consumer sentiment fell slightly going into September, a survey showed, hitting a 10-month low as the euro zone debt crisis and fears of another recession in Europe and the United States weighed on expectations

Reuters