European shares hit 2-wk high on Fed's modest stimulus cut

Reuters - UK Focus

* FTSEurofirst 300 gains 1.6 pct, Euro STOXX 50 up 2 pct

* Stocks rally as Fed's stimulus cut seen modest

* Cyclicals up; financials up about 2 percent

By Atul Prakash

LONDON, Dec 19 (Reuters) - European shares hit a two-weekhigh on Thursday, tracking gains on Wall Street and in Asia, ina broad rally after the Federal Reserve announced a modest cutin its stimulus and hinted it would keep rates low for a longerperiod.

The U.S. central bank said it would trim the pace of itsmonthly asset purchases by $10 billion to $75 billion andsuggested its key interest rate would stay at rock bottom evenlonger than previously promised.

"The overall announcement is not as hawkish as it firstappeared. As the Fed announced the taper, it also pushed outexpectations for when it is going to lift the policy rate,"Daniel McCormack, strategist with Macquarie, said.

"None of this is a negative. Equities tend to outperform intightening cycles and the reason for that is that in tighteningcycles growth and demand is strong. This all means you want tobe in cyclicals such as industrials, technology, consumerdiscretionary and financials."

Cyclical sectors were top performers in early trading, withfinancials , construction and materials and property companies rising 1.9 to 2.4 percent.

At 0837 GMT, the FTSEurofirst 300 was up 1.6percent at 1,279.12 points after rising as far as 1,280.51, thehighest since early December. The index is up nearly 13 percentso far this year.

European equities mirrored overnight gains in U.S. stocks,with both the S&P 500 and the Dow Jones closing atall-time highs following the move of the Fed, which also saidthe U.S. economy was strong enough to easily withstand aliquidity cut.

"By tapering now, (Fed Chairman Ben) Bernanke has taken awayquite a bit of the short-term market risk. He took away with onehand some of the stimulus, but gave it back by the other bystressing that short-term rates won't go up for a longerperiod," Philippe Gijsels, head of research at BNP Paribas (Milan: BNP.MI - news) Fortis Global Markets, said.

"We believe that the equity market rally has legs and wewill see a positive drift into the New Year. This will beparticularly true for the euro zone, where valuations are stillvery attractive."

The euro zone's blue chip Euro STOXX 50 tradesat 12.2 times expected earnings in the next 12 months, comparedwith 14.8 times for the U.S. S&P 500 index, according to ThomsonReuters Datastream.

The Euro STOXX 50 index rose 2 percent to 3,033.49 points,crossing its 50-day moving average of 3,024.58, a bullish signalfor the index.

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