European stocks ended higher yesterday as strong US home sales and durable goods data helped soothe worries over the health of the economy and kept the market's week-long winning run alive.
However, lingering concerns over the credit markets and the fallout from the US subprime market crisis limited the gains, with the pan-European FTSEurofirst 300 index closing just 0.33 per cent higher, its sixth session of gains.
The situation was similar all around Europe, with France's CAC 40 rising 0.8 per cent to outpace Britain's FTSE 100 index, which closed up 0.4 per cent, and Germany's DAX, which lost 0.1 per cent.
In Ireland, the Iseq closed 0.3 per cent lower, the index's first retreat of the week. Over the course of the past five sessions though it is up 2.7 per cent, a gain that added more than €3 billion back onto its value, this was welcomed by dealers. The presiding sentiment was relief, with dealers expressing delight that some of the volatility of recent weeks appeared to have subsided - at least for the time being.
While the US has been the major cause of the volatility amid concerns that a rising number of defaults in the subprime mortgage market there could translate into big losses for financial institutions and dampen economic growth around the world, it also played a part in the calm.
Data released yesterday showed that new home sales in the US unexpectedly rose in July, while new orders for durable goods surged. Both sets of news helped to ease investor concerns about the US economy.
Closer to home, sentiment was also helped by comments from euro zone central bank officials, who said that an interest rate rise next month was not set in stone. The decision will depend upon the performance of global stock markets, they said.
Still, traders warned of complacency, saying the rocky ride of late is most likely not over yet, and as usual, where there is good news, the bad wasn't too far behind.
The robust new homes and durable goods data came just one day after the head of Countrywide Financial Corp, the biggest US mortgage company, said the persistent downturn in the US housing market could lead to a recession.
"We expect the seizure in credit markets to gradually ease, but greater volatility, higher risk premiums and tighter lending standards are likely to persist," ABN Amro analysts wrote in a note.
"This should affect the wider US economy, most notably through lower demand for mortgages. Reduced access to capital might also slow business investment."
In the US, markets were trading in a similar manner, with Wall Street on course to end the week higher. As in Europe, activity was muted, with dealers saying it was at last a day that was more typical for this time of year.
However, a week after the US Federal Reserve's decision to cut the rate at which it lends to banks, the move has yet to achieve its purpose of reviving global money markets. Instead, the cut in the Fed's discount rate was followed by the most extreme panic in short-term money markets since, at least, 1987.
The money markets spent the rest of the week slowly recovering, but by yesterday the difficulties for many companies in raising short-term financing remained acute.
These difficulties, in turn, strengthened the belief that the central bank would be forced to intervene further by cutting the main Fed funds rate, at which banks lend to each other.
(Additional reporting: Financial Times service/Reuters)
