European shares edged up on Friday to end at their highest closing level since late September 2008, as upbeat US consumer sentiment data helped boost confidence over the prospects for economic recovery. Gains were kept in check, however, by fears about China's efforts to tighten monetary policy after the country's central bank raised lenders' required reserves by 50 basis points.
The pan-European FTSEurofirst 300 index closed 0.2 percent higher at 1,125.59 points, touching its highest closing level in more than 26 months, though volumes were low at just 60 percent of the average 90-day volume as the Christmas holiday period draws closer.
The index also posted its biggest weekly gain since early November, up almost 2 percent, following five straight days of gains. Confidence over the pace of economic recovery in the United States was boosted after the Thomson Reuters/University of Michigan's consumer sentiment index showed a better-than-expected rise in December.
The data follows a move earlier this week by US President Barack Obama to forge a compromise to extend the Bush-era tax breaks for two years, bolstering expectations for consumer spending and the economy. The news came after the survey was completed, however.
"People are keeping an eye on economic numbers but until they all start moving in the same direction across the board, traders are still going to be a bit jittery," Manoj Ladwa, senior trader at ETX Capital, said. Carmakers rose, with BMW up 3.9 percent after Natixis raised its price target and as the sector recovered from the previous session's sharp losses when shares were knocked by a report China may end tax breaks for passenger cars.
Volkswagen, Daimler and Porsche gained 3 to 6.4 percent. Mining shares were also higher, as copper prices rose near record highs on supply worries and after the outlook for demand was boosted by strong Chinese import data. Kazakhmys, Eurasian Natural Resources, Xstrata and Vedanta Resources added 1.2 to 3.2 percent. Concerns over China's monetary policy caused some jitters among investors, with analysts believing the country may have to hike interest rates again in the near term to head off inflation risks following a surprise rate rise in October.
The decision on Friday to raise banks' required reserves rather than interest rates means officials have opted for a milder form of monetary tightening for the time being, suggesting they believe they are still well able to control price pressures. "I would describe the move as good housekeeping. We have to respect the restrictions that they're putting in place so that we don't have an asset explosion," said David Buik, senior partner at BGC Partners. The banking sector in Europe was on the back foot, with Spanish banks Santander, Banco de Sabadell and BBVA down 1.3 to 2.3 following gains this week.
In a research note, UBS analysts quantified further potential capital requirements for Spanish banks at up to 120 billion euros. Among individual fallers, German cement producer HeidelbergCement lost 1.7 percent, as analysts point to European Union regulators launching an investigation into suspicions that European cement companies may have fixed prices and blocked imports or exports.
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