European shares advance on earnings optimism

European equities climbed higher on Tuesday, with strong earnings reports from companies such as engineer GKN and retailer Next outpacing the threat to the region's economy from further sanctions against Russia.

GKN surged 8.2 percent after its car parts supply division boosted first-half profits, while clothing retailer Next gained 2.8 per cent after raising its guidance for annual sales and profit. Telecom firm Orange was up 2.4 per cent after results.

“Markets are receiving a bid from better-than-expected earnings. It’s understandable why markets remain buoyant even with current geopolitical risks,” Michael Jarman, head of equity strategy at H2O Markets, said.

“However I believe that markets are trading at fair value and I see upside stock market returns as limited ... so protecting your portfolio is something that investors should start to consider.”

The FTSEurofirst 300 index of top European shares was up 0.6 percent at 1,377.67 points by 1424 GMT, helped by positive earnings reports.

Generally, about 48 per cent companies beat analysts’ earnings per share estimates in a quarter. The second quarter earnings are expected to grow by 14.2 per cent from the corresponding period last year.

“Going forward, the earnings season should be decent and I expect more surprises on the upside than on the downside. The economy generally appears to be a lot stronger,” Peter Dixon, equity strategist at Commerzbank, said.

The market also got some support in later trading after data showed U.S. consumer confidence jumped in July to a monthly high not seen since October 2007.

However, investors were cautious on the risk of more sanctions against Russia.

Oil major BP fell 1.7 per cent despite posting a 34 per cent increase in its profit. BP said more sanctions “could have a material adverse impact” on its joint venture in Russia.

“Politicians are under increased pressure to implement much more aggressive sanctions, which not only run the risk of retaliation from Russia but also might hurt the European economy itself,” Markus Huber, sales trader at Peregrine & Black, said.

US and European leaders have agreed to impose wider sanctions on Russia’s financial, defence and energy sectors as Ukraine said its forces advanced towards the crash site of Malaysian flight MH17.

On the downside, Belgian insurer Ageas slumped 10 per cent after a Dutch court said that financial group Fortis, which was carved up in 2008 and superseded by Ageas, misled shareholders in the run-up to its bailout.

Portugal's troubled bank Banco Espirito Santo fell 9.2 per cent. A Luxembourg court accepted requests for creditor protection filed by Espirito Santo Financial Group, which is the largest shareholder in Banco Espirito Santo.

Carmaker Renault fell 4 per cent as its sales and cash flow suffered ahead of the replacement of key models, while Deutsche Bank was up just 0.3 per cent after reporting a 16 per cent rise in quarterly pre-tax income.

The spectre of costly litigation and settlements cast a shadow over Deutsche Bank’s results, with the bank topping up reserves for future litigation by 22 per cent to €2.2 billion.

Reuters