European shares rise on prospect of U.S. debt deal

Reuters

* FTSEurofirst 300 up 0.4 pct, Euro STOXX 50 up 0.1 pct

* Euro STOXX 50 hits new 2-1/2 year high

* Stocks still in 'sweet spot', says Lyxor AM'sAsseraf-Bitton

* Europe's earnings momentum improves, but still negative

By Blaise Robinson

PARIS, Oct 11 (Reuters) - European stocks edged higher onFriday, keeping the previous day's rally alive, while investorswaited to see if an agreement would finally be reached inWashington on the U.S. debt ceiling.

At 1030 GMT, the FTSEurofirst 300 index of topEuropean shares was up 0.4 percent at 1,250.14 points, aftersurging 1.7 percent on Thursday.

The euro zone's blue-chip Euro STOXX 50 indexwas up 0.1 percent at 2,973.62 points, hitting a new 2-1/2 yearhigh.

Stocks around the world had lost ground in the past threeweeks after an impasse in U.S. budget talks led to a partialgovernment shutdown and sparked concerns about the extension ofWashington's borrowing authority beyond an Oct. 17 deadline.

On Thursday, President Barack Obama and Republican leadersappeared ready to end the deadlock. One senior Republican saidan agreement could come on Friday.

"The question is: what kind of deal will be reached? Atemporary solution would just mean more negotiations in theweeks to come and more stress for markets, so we're not out ofthe woods yet and the risk of a U.S. credit downgrade remains,"said David Thebault, head of quantitative sales trading atGlobal Equities.

"The fact that the biggest economy in the world struggles toraise its borrowing limit is also putting the spotlight back onother countries which struggle with their debt," said Thebault,who recommends buying put spreads to hedge stock portfolios "atleast until December".

Around Europe, Germany's DAX index was up 0.3percent on Friday, and France's CAC 40 up 0.1 percent.

Britain's FTSE 100 index, whose companies have asignificant exposure to the U.S. economy, was up 0.7 percent,with GlaxoSmithKline up 1 percent and Unilever up 1.1 percent.

The Euro STOXX 50 Volatility index, known as theVSTOXX, was down 7 percent, indicating a drop in investors' riskaversion. Europe's widely-used gauge of investor sentiment,which is based on put and call options on Euro STOXX 50 stocks,has fallen 21 percent since a peak hit on Wednesday.

"Even though investors get nervous when political tensionsrise, the backdrop for equities remains quite positive: veryaccommodative central banks, improvement on the macro front, andrelatively good corporate fundamentals," said JeanneAsseraf-Bitton, head of global cross-asset research at LyxorAsset Management, which has $98 billion under management.

"It's sort of a 'sweet spot' for stocks. Now, with theearnings season set to start, we need to see an improvement inthe earnings momentum. It has improved lately in Europe,although it remains negative for now."

Europe's earnings momentum - analyst forecast upgrades minusdowngrades as a percentage of total - has recently improved,from minus 3.2 percent in July to minus 2.1 percent currently,data from Thomson Reuters Datastream shows.

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