Published March 07, 2013
European shares crept higher on Thursday although traders said further gains could be limited in the near term on concerns over how the European Central Bank would deal with Italy's political deadlock.
The pan-European FTSEurofirst 300 index, which had reached a 4-1/2 year intraday high of 1,193.35 points on Wednesday, was up by 0.2 percent at 1,188.09 points by around midday.
The euro zone's blue-chip Euro STOXX 50 index advanced 0.4 percent to 2,690.88 points, while Germany's DAX rose 0.2 percent to 7,937.83 points, nearing five-year highs reached earlier this week.
While investors said more gains were likely over the course of the year, they said that in the nearer term, there was a risk markets would be volatile due to uncertainty over how the ECB would address Italy's problems at its meeting on Thursday.
Italy's elections last month produced a deadlock, which reignited worries over how Italy and the likes of Spain could continue with austerity measures to heal their debt-ridden economies, given public anger to such tough economic reforms.
The ECB is expected to hold interest rates at a record low of 0.75 percent but analysts say ECB head Mario Draghi will reaffirm that there is no question of loosening the central bank's rules on bond-buying to accommodate Italy.
MB Capital Trading Director Marcus Bullus said his firm was advising clients to go into the ECB meeting on Thursday with a "neutral" position - namely neither betting on major gains nor on a major fall on equity markets as the ECB meeting progressed.
Bullus said investors wanted Draghi to reaffirm his support for the euro zone's economy in light of the problems with Italy but that it could be hard for Draghi to come up with concise solutions.
"He does need to address what is happening in Italy but I don't see how he can do that in a positive light. Markets could be very choppy as the ECB meeting progresses," said Bullus.
Analysts at ING added that some investors were hoping that the ECB may cut rates, which could boost stocks, although they felt this was unlikely.
"The appreciation of the euro exchange rate and new market uncertainty after the Italian elections have given rise to new speculation about a possible ECB rate cut ... However, in our view, the ECB is still inclined to keep rates on hold," they wrote in a note.
British power company Aggreko and French supermarket retailer Carrefour led gainers on the FTSEurofirst 300 after posting reassuring results, with Aggreko rising 14.6 percent while Carrefour advanced 3.8 percent.
However, UK insurer Aviva slumped 12.8 percent after slashing its dividend and the stock's fall was one of the biggest drags on the FTSEurofirst 300.
"The markets have reacted with their feet today on the near halving of the Aviva dividend as institutional investors looking for solid income plays in this low-interest environment headed for the exit," Edison Investment Research analyst Martyn King wrote in a research note.
Lloyds TSB Private Banking's Ian Martin said that even though there was the likelihood that equity markets could experience a minor pull-back in the near-term, the longer-term outlook remained a bullish one.
Martin said most investors expected the broader global economy to strengthen, shrugging off any weakness in Europe, and that investors were still looking to buy up shares on days when the stock market fell.
"I don't anticipate a major pullback. When I talk to investors, they're always looking to buy the market on the dip," he said.