European shares edged up on Monday, as heavyweight miners rose on strong metals prices and defensive drugmakers and tobacco firms gained on concerns over the impact of rising inflation on growth prospects.
Gains, however, were kept in check by falls on the German DAX index .GDAXI, as sentiment was hit by data showing a drop in German manufacturing purchasing managers index (PMI) in January, despite strong numbers from the services sector. [ID:nSLALCE7ND]
The pan-European FTSEurofirst 300 .FTEU3 index of top shares closed 0.3 percent higher at 1,151.18 points.
“Cyclicals are being sold and investors are moving into defensives,” said Heino Ruland, strategist at Ruland Research in Frankfurt. “It has a lot to do with worries about inflation in China and concerns that China might overdo it with regards to tightening, which could cause global growth to slow.”
Heavyweight mining shares rose, with the STOXX Europe 600 basic resources index .SXPP up 0.9 percent, boosted by strong copper prices CMCU3 on supply constraints.
Defensive drugmakers also gained, with the healthcare index .SXDP up 1.1 percent and British American Tobacco (BATS.L) up 4 percent, as investors sought perceived safe-haven qualities in an environment of rising inflation.
Headline inflation in the euro zone rose to 2.2 percent in December, the first time in two years it has risen above the central bank’s target of just below 2 percent.
European Central Bank (ECB) President Jean-Claude-Trichet was quoted as saying on Sunday that the core euro zone inflation rate, excluding volatile energy and food prices, does not gauge future price pressures well, suggesting it was taking fresh steps towards hiking interest rates this year. [ID:nLDE70N0MV]
“There is an increasing fear that European markets will begin to struggle from here on and that inflation cannot be ignored,” said Howard Wheeldon, senior strategist at BGC Partners.
Further inflation expectations were fuelled by Markit Flash Eurozone PMI data on Monday which showed factories in the euro zone reported the strongest monthly price increase on record for raw materials and fuel in January. [ID:nLDE70N0SH]
Among individual movers, Philips Electronics (PHG.AS) fell 5.5 percent as it posted disappointing fourth-quarter earnings. [ID:nLDE70N051]
Britain’s major banks fell after a weekend speech by the head of the UK’s Independent Commission on Banking, set up to probe a shake-up of the sector, raises concerns the banks may have to raise more capital to make their retail bank arms safer.
Lloyds (LLOY.L) and Royal Bank of Scotland (RBS.L) shed 3.4 and 1.9 percent respectively.
Across Europe, Britain’s FTSE 100 .FTSE rose 0.8 percent, Germany’s DAX .GDAXI added 0.1 percent and France’s CAC 40 .FCHI climbed 0.4 percent.
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