By Sarah Turner
European shares ended at a five-year high on Thursday, the result of a rebound in commodity prices and interest-rate decisions that met market expectations.
The pan-European Dow Jones Stoxx 600 ended at its best level since May 2001, rising 0.6% at 344.99, with some of the top movers tied to deal talk.
Corus Group shares surged 16% amid speculation that it will enter into a deal with India's Tata Steel. Banca Popolare di Milano shares jumped 6% on hopes that it may be the next Italian bank to be snapped up following failed deal talks with Banca Popolare Italiana Scarl.
The gains came as the Bank of England left interest rates on hold at 4.25%, as expected, while the European Central Bank lifted rates to 3.25% from 3%, also as expected. Also in line with market expectations, ECB President Jean-Claude Trichet hinted at a further rate increase before the end of the year in the post-decision news conference.
Continental indexes gained amid relief that future rate increases would probably proceed as expected and keep growth on track, building on earlier optimism that U.S. economic growth will continue at a pace that will sustain job creation and corporate profits.
U.S. shares got off to a subdued start on Thursday, after rising to record highs in the previous two sessions.
The U.K. FTSE 100 index rose 0.6% at 6,004, the German DAX Xetra 30 index increased 0.5% at 6,075 and the French CAC-40 index advanced 0.6% at 5,288.
Commodity-price linked companies shrugged off recent weakness to gain ground as crude-oil futures went back over $60 a barrel and as metals prices also strengthened.
In the energy sector, gas explorer BG Group shares rose 3.4% and shares of Spain's Repsol gained 2%.
In the metals arena, shares of Rio Tinto /zigman2/quotes/208934945/delayed UK:RIO +0.87% rose 3.6%, while shares of BHP Billiton added 4.1%.
More deal news came from the airline sector after Aer Lingus Group said Ryanair Holdings had offered to buy the firm for €1.48 billion ($1.89 billion), or €2.80 a share.
Ryanair said it has acquired over 16% of the shares of Aer Lingus, which listed on the Dublin and London stock markets at the end of September. Aer Lingus management opposed the offer.
Aer Lingus shares advanced 15% to €2.86. Shares in Ryanair slipped 1%.
British Airways shares lost 1.8% after Citigroup downgraded the carrier to hold from buy, citing lighter-than-expected September traffic and the firm's reduced fiscal 2007 revenue guidance.
Citigroup also said that a strike by pilots over pensions changes can't be ruled out, but added that the delay to Airbus' A380 is positive, because of the effect it has on competitive capacity.
Shares in French auto maker Renault gained 0.9% in Paris after three-way alliance talks with Nissan Motors of Japan and General Motors of the U.S. ended without success.
"Even if the deal would have created synergies, the complexity of linking up with a massive company not keen on doing a deal was justifiably concerning, as was the risk of disorganization and bad timing," said analysts at Societe Generale.
Analysts noted that the GM talks provided evidence that Renault is actively seeking ways to boost sales and margins over the long term. "Talks with Ford would be seen as more reasonable," they added.
J.P. Morgan downgraded Heineken to underweight from neutral and upgraded Remy Cointreau to neutral from underweight. J.P. Morgan said Heineken appears fully valued and, once cost-saving benefits have been delivered, organic profit growth will struggle to exceed 6% to 7%. Shares made below-market gains of 0.4%.
The broker cited Remy Cointreau's successful restructuring into a group focused on premium spirits with significant market share in the U.S. and China. Shares of the maker of Remy Martin cognac and Piper-Heidsieck champagne gained 3.9%.
Merrill Lynch downgraded supermarket operator Delhaize to neutral from buy, citing the firms possible merger with Ahold. A merger would be "fraught with danger," Merrill Lynch said. Shares lost 0.2%.
Outdoor advertising company JC Decaux was upgraded to overweight from equal-weight at Morgan Stanley, which said the current price doesn't reflect the long-term growth prospects of the company.
The broker believes margin guidance from JC Decaux has been misunderstood and that the firm's medium-term street furniture margin of 40% is based on more contract wins than the market is assuming. Shares increased 3%.
Write to Sarah Turner at email@example.com