European shares lifted on the back of miners and drug firms

EUROPEAN shares edged up yesterday, as heavyweight miners rose on strong metals prices and defensive drugmakers and tobacco firms gained on concerns over the impact of rising inflation on growth prospects.

Gains, however, were kept in check by falls on the German DAX index, as sentiment was hit by data showing a drop in German manufacturing purchasing managers index in January, despite strong numbers from the services sector.

The pan-European FTSEurofirst 300 index of top shares closed 0.3 per cent higher at 1,151.18 points. Britain’s FTSE 100 rose 0.8 per cent to 5,943.85.

“Cyclicals are being sold and investors are moving into defensives,” said Heino Ruland, strategist at Ruland Research in Frankfurt. “It has a lot to do with worries about inflation in China and concerns that China might overdo it with regards to tightening, which could cause global growth to slow.”

Heavyweight mining shares rose, with the STOXX Europe 600 basic resources index up 0.9 per cent, boosted by strong copper prices on supply constraints.

Defensive drugmakers also gained, with the healthcare index up 1.1 per cent and British American Tobacco up four per cent, as investors sought perceived safe-haven qualities in an environment of rising inflation.

Headline inflation in the Eurozone rose to 2.2 per cent in December, the first time in two years it has risen above the central bank's target of just below two per cent.

European Central Bank (ECB) President Jean-Claude-Trichet was quoted as saying on Sunday that the core Eurozone inflation rate, excluding volatile energy and food prices, does not gauge future price pressures well, suggesting it was taking fresh steps towards hiking interest rates this year.

“There is an increasing fear that European markets will begin to struggle from here on and that inflation cannot be ignored,” said Howard Wheeldon, senior strategist at BGC Partners.

Further inflation expectations were fuelled by Markit Flash Eurozone PMI data on Monday which showed factories in the euro zone reported the strongest monthly price increase on record for raw materials and fuel in January.

Among individual movers, Philips Electronics fell 5.5 per cent as it posted disappointing fourth-quarter earnings.

Britain’s major banks fell after a weekend speech by the head of the UK's Independent Commission on Banking, set up to probe a shake-up of the sector, raises concerns the banks may have to raise more capital to make their retail bank arms safer.

Lloyds and Royal Bank of Scotland yesterday shed 3.4 and 1.9 per cent respectively.