European Shares Gain on Fed Promise of Low Interest Rates

(REUTERS) -- European shares rose on Thursday, halting two-days of losses, after the U.S. Federal Reserve said interest rates would remain low for a considerably longer period than expected and it is ready to offer additional stimulus to boost economic growth.

Gains were capped, however, by concerns about Greek debt talks needed to avoid a chaotic default as well as worries about an Italian bond auction which would test demand for risky debt.

Cyclical stocks, whose earnings are supported when economic growth is strong, were the star performers, with the STOXX Europe 600 Basic Resources index .SXPP rising 1.3 percent.

Kazakh miner Kazakhmys (KAZ.L) was a standout gainer in the sector, rising 4 percent to feature in the FTSE 100 .FTSE top movers list, also buoyed by results after it reported better-than-expected production of by-products gold and silver.

Risk appetite towards cyclical companies improved after the Fed said it would keep interest rates near zero until at least late 2014, and left the door open for further bond purchases, which could kick start the economy and give a boost to company profits.

We are definitely seeing risk on at the moment, markets have got excited as economic growth helps bring down debt said Louise Cooper, markets analyst at BGC Partners.

The Fed for the first time adopted an inflation target to help price stability and Federal Reserve Chairman Ben Bernanke at the news conference said he was cautious about recent improvements in the economy.

It tells us an awful lot about the state of the economy in the United States. If the Fed is telling us interest rates are going to stay low the recovery must be fragile, Cooper said.

BIG IMPACT

The slowing economic environment in Europe, hit by the region's debt crisis, took its toll on Hennes & Mauritz (HMb.ST) which fell 1.4 percent to feature in the biggest losers list after it delivered results below expectations.

By 0937 GMT, the pan-European FTSEurofirst 300 .FTEU3 index of top shares was up 0.4 percent at 1,043.78 points after falling 0.8 percent in the previous two sessions on worries over the Greek debt talks, with still no agreement being reached.

If a chaotic default occurs it could send global economies into recession and would have a big impact on company earnings.

Longer term there is still the same problem in the euro zone peripheries, said Bill Dinning, head of investment strategy at Kames Capital in Edinburgh, which has $76.4 billion under management.

The underlying competitiveness of southern Europe continues to deteriorate. The investment question is whether or not there will be enough response by policymakers to postpone the worst- case scenario.

Dinning added that Kames Capital had been adding German equities to its portfolios on the basis that global monetary easing might suggest the rally will continue.

The index was trading between its 50 percent Fibonacci Retracement at 1,021.77 from its February 2011 to September 2011 sell-off and its 61.8 percent Fibonacci Retracement of the same sell-off at 1,061.59.