European shares hit 2-wk high on Fed's modest stimulus cut

December 19, 2013

* FTSEurofirst 300 gains 1.6 pct, Euro STOXX 50 up 2 pct

* Stocks rally as Fed's stimulus cut seen modest

* Cyclicals up; financials up about 2 percent

By Atul Prakash

LONDON, Dec 19 (Reuters) - European shares hit a two-week high on Thursday, tracking gains on Wall Street and in Asia, in a broad rally after the Federal Reserve announced a modest cut in its stimulus and hinted it would keep rates low for a longer period.

The U.S. central bank said it would trim the pace of its monthly asset purchases by $10 billion to $75 billion and suggested its key interest rate would stay at rock bottom even longer than previously promised.

"The overall announcement is not as hawkish as it first appeared. As the Fed announced the taper, it also pushed out expectations for when it is going to lift the policy rate," Daniel McCormack, strategist with Macquarie, said.

"None of this is a negative. Equities tend to outperform in tightening cycles and the reason for that is that in tightening cycles growth and demand is strong. This all means you want to be in cyclicals such as industrials, technology, consumer discretionary and financials."

Cyclical sectors were top performers in early trading, with financials , construction and materials and property companies rising 1.9 to 2.4 percent.

At 0837 GMT, the FTSEurofirst 300 was up 1.6 percent at 1,279.12 points after rising as far as 1,280.51, the highest since early December. The index is up nearly 13 percent so far this year.

European equities mirrored overnight gains in U.S. stocks, with both the S&P 500 and the Dow Jones closing at all-time highs following the move of the Fed, which also said the U.S. economy was strong enough to easily withstand a liquidity cut.

"By tapering now, (Fed Chairman Ben) Bernanke has taken away quite a bit of the short-term market risk. He took away with one hand some of the stimulus, but gave it back by the other by stressing that short-term rates won't go up for a longer period," Philippe Gijsels, head of research at BNP Paribas (Milan: BNP.MI - news) Fortis Global Markets, said.

"We believe that the equity market rally has legs and we will see a positive drift into the New Year. This will be particularly true for the euro zone, where valuations are still very attractive."

The euro zone's blue chip Euro STOXX 50 trades at 12.2 times expected earnings in the next 12 months, compared with 14.8 times for the U.S. S&P 500 index, according to Thomson Reuters Datastream.

The Euro STOXX 50 index rose 2 percent to 3,033.49 points, crossing its 50-day moving average of 3,024.58, a bullish signal for the index.