GLOBAL MARKETS: European Stocks Advance On Earnings Delight

LONDON -- European stock markets were sharply higher Thursday, with better-than-expected earnings from some of the region's leading blue-chip companies adding further impetus ahead of key rate-setting meetings by the Bank of England and the European Central Bank.

"The strength of quarterly numbers in 2Q '09 and the probability of 2H '09 earnings power (bolstered by production increases and tight restraint on corporate costs) are supportive of further gains, especially if investors chase the market as has often been the case," said Tobias M. Levkovich, chief equity strategist at Citigroup.

At 0815 GMT, the Dow Jones STOXX 600 index was up 1.1% at 229.37, London's FTSE 100 index was up 1.1% at 4698.59, Frankfurt's DAX index was up 0.8% at 5399.35, and the CAC-40 index in Paris was up 1.0% at 3494.33.

Meanwhile, strategists at Bank of America-Merrill Lynch confirmed their medium-term target for the Dow Jones STOXX 600 index of 300 by end-2010.

"This rests on a belief that the worst of the economic recession is behind us and despite an initial lag European recovery building momentum through 2010, pulled along by strong improvement in the wider global economy and a continuing deluge of global liquidity," said the strategists.

"This provides economic and corporate earnings catalysts to allow markets to take advantage off still undemanding valuation levels," they added.

Thursday also sees the key interest rate-setting meetings by the Bank of England and the European Central Bank at 1100 GMT and 1145 GMT respectively, which could determine the markets' short term direction.

Although both central banks are expected to keep rates on hold, the ECB will have to stay on guard to fight possible further deflationary pressures, while further progress on the BOE's possible extension of the current quantitative easing program will be widely anticipated.

"The Monetary Policy Committee might send the message that a decision to halt the quantitative easing is based on the recent jump of some economic indicators that suggest that a recovery process is on track," said Annalisa Piazza, market economist at Newedge Group.

"Such a message could help to support the so-called self-fulfilling expectations and improvement in hard data might follow. However, it is a risky call and the BOE needs to be ready to act again soon, should future data surprise on the downside," added Piazza.

On the corporate front, financial stocks were once again under the spotlight, following earnings from German reinsurer Hannover Re AG (HNR1.XE) and Belgian bank and insurer KBC Group NV (KBC.BT). Hannover Re confirmed its 2009 earnings targets after second-quarter net profit more than doubled, while KBC Group delivered EUR302 million net profit for the second quarter.

Shares in Hannover Re climbed 3.9%, while KBC Group added 17%. The pan-European Dow Jones STOXX 600 insurance index was 1.8% higher, while Dow Jones STOXX 600 banks index gained 2.4%.

Also, food and beverage company Unilever PLC (UN, UL) shares traded 4.9% higher, after it beat expectations with its second-quarter sales as the new chief executive's focus on restoring volume growth brought quick results. The pan-European Dow Jones STOXX 600 food & beverage index added 1.5% to 257.91.

Over in the U.S. Wednesday, the Dow Jones Industrial Average closed down 39.22 points, or 0.4%, at 9280.97. The slide snapped a four-day winning streak for the index to start August, after the DJIA had its biggest July in 20 years. The Standard & Poor's 500 slid 2.93, or 0.3%, to 1002.72, also snapping a four-day winning streak.

Still, Asian stock markets have posted gains early Thursday, with Japan's Nikkei 225 closing 1.3% higher, South Korea's Kospi Composite ending up 0.4% and the Hang Seng index in Hong Kong last seen 1.9% higher.

"The market's downside is limited because foreign funds continue to buy amid excessive liquidity," said Tokyo-based Tachibana Securities analyst Kenichi Hirano.

In foreign exchange markets, rangebound trading has been the order of the day so far Thursday with traders reluctant to commit themselves ahead of the two central bank meetings and Friday's nonfarm payrolls number.

At 0830 GMT, the euro stood at $1.4394, while sterling stood at $1.6984. The dollar traded at Y95.39.

Still, "there is much risk for sterling today as the market is quite split as to the outcome of the MPC announcement," said Sue Trinh at RBC Capital Markets.

Elsewhere, spot gold was trading lower at $963.55 per troy ounce, around $4 below its close in New York.

Meanwhile, the front-month September Nymex crude oil futures contract had edged higher in Europe, after the contract posted some gains Wednesday as a weakening dollar offset a bigger-than-expected rise in U.S. oil inventories.

At 0830 GMT, the contract stood 7 cents higher at $72.05 a barrel on Globex, after settling at $71.97 a barrel, up 55 cents.

"Traders are hesitant to take large positions on either (buy or sell) side for economic reasons," said Zachary Oxman, managing director of TrendMax Futures.

"People are feeling the recovery is slower than expected and we might see more downside ahead."

European government bonds were weaker Thursday, amid more signs of an improving global economy and as money moved into the riskier equity markets.