European Stocks Rise; Ericsson, Nokia, Shell, Total Advance

By Adam Haigh

Oct. 17 (Bloomberg) -- European stocks rose, with the Dow Jones Stoxx 600 Index rebounding from its steepest two-day retreat since 1987, on better-than-estimated earnings at Sony Ericsson Mobile Communications Ltd. and lower money-market rates. Ericsson AB added 5.9 percent. Nokia Oyj rose 10 percent as WestLB upgraded the world's biggest mobile-phone maker following declines. Royal Dutch Shell Plc and Total SA climbed more than 4 percent as crude rebounded from a 13-month low.

Investors were whipsawed this week as governments injected $2 trillion to bail out banks amid growing signs the global economy is on the brink of a recession. Europe's Stoxx 600 had its biggest two-day surge on record, before posting the steepest two-day slump since 1987. The cost of borrowing dollars in London is headed for its first weekly drop since July.

``There are some rays of hope out there,'' said Alan Beaney, head of investments at Principal Investment Management in Sevenoaks, England, which has $1.6 billion in assets under management. Declines in money-market rates are ``the start of a longer trend,'' Beaney said in a Bloomberg Television interview.

The Stoxx 600 added 3.8 percent to 214.15 at 4:02 p.m. in London as 15 of 19 industry groups increased. The index has gained 4.5 percent this week, its first advance in five weeks.

The Standard & Poor's 500 Index gained 0.4 percent, while the MSCI Asia Pacific Index increased 0.5 percent.

National Markets

Stocks pared gains after a report showed housing starts in the U.S. fell more than forecast last month and construction of single-family homes plunged to the lowest level in a quarter century.

National benchmark indexes increased in 14 of the 18 western European markets. The U.K.'s FTSE 100 added 4.4 percent, and France's CAC 40 rose 3.4 percent. Germany's DAX gained 3.1 percent.

The Stoxx 600 climbed 13 percent in the first two days this week. Reports showing declines in U.S. retail sales and an increase in U.K. unemployment to the highest since November 2006 drove shares lower, sending Europe's benchmark index to its steepest retreat since the market crash of 1987.

Options expiring in the U.S. today may add to this week's volatility.

The most widely owned S&P 500 options expiring this week are October 1,150 puts. The S&P 500's 18 percent retreat from that strike price profited buyers of those contracts, which increased almost sixfold in value this month. Even after yesterday's 4.3 percent surge, the index has slumped 22 percent in three weeks.

Hedging Risk, Libor

Market makers who are short the options may try to hedge that risk, said Scott Nations, president of Fortress Trading Inc., a Chicago-based firm that trades options and futures. Investors who are short puts as the market fall, they need to sell more of the underlying, he said, and if it goes up, they have to buy more back.

The London interbank offered rate, or Libor, for three- month loans in dollars dropped for a fifth day, sliding 8 basis points, or 0.08 percentage point, to 4.42 percent, the British Bankers' Association said. It declined 40 basis points this week. The overnight rate for dollars slid 27 basis points to 1.67 percent, the lowest level since September 2004. Asian rates also fell.

Concern the seizure in credit markets will trigger a global recession erased $27 trillion in value from stocks worldwide, dragging the Stoxx 600 down 42 percent this year. Financial firms reported $660 billion in losses and writedowns from mortgage-related investments since the beginning of 2007.

Ericsson, Nokia

Ericsson rallied 5.9 percent to 50.60 kronor. The mobile- phone venture of Sony Corp. and Ericsson reported a smaller third-quarter loss than analysts had anticipated as its unit shipments and market share held up.

Nokia rose 10 percent to 12.46 euros. WestLB raised the stock to ``hold'' from ``reduce.''

``As the share price is already largely reflecting this negative scenario in our view we upgrade'' the stock, WestLB wrote in a note to clients. The shares have fallen 28 percent in two months.

Shell, Europe's largest oil company, rallied 4 percent to 1,346 pence as Goldman Sachs Group Inc. recommended buying the stock and crude oil gained as much as 4.5 percent to $73.02 a barrel. Total, the third largest oil producer in Europe, added 4.1 percent to 34.565 euros.

Carrefour SA, Europe's largest retailer, advanced 4 percent to 25.66 euros. Goldman Sachs added the shares to its ``conviction buy'' list citing recent price declines.

Valuations

The Stoxx 600 was valued at 8.6 times earnings of companies yesterday, near the cheapest on record. The MSCI World Index traded at 11.4 times the earnings of its 1,730 companies, and the S&P 500 was valued at 18.7 times profit, near the lowest in more than a year.

Warren Buffett said he's buying U.S. stocks and, if prices stay attractive, his personal investments, as distinct from his stake in Berkshire Hathaway Inc., will soon be wholly in American equities.

Writing in the New York Times, he said he's following the principle: be fearful when others are greedy, and greedy when others are fearful.

ING Groep NV, the biggest Dutch financial-services firm, tumbled 22 percent to 7.85 euros on speculation the bank may need to raise capital.

The Netherlands made 20 billion euros available to financial institutions on Oct. 10 to boost liquidity and strengthen capital amid a worsening global credit crunch. ING said at the time that it would assess the government package and the ``possible implications once more details are available.'' That statement still holds, spokeswoman Carolien van der Giessen said today.

Ongoing Speculation

``There seems to be ongoing speculation that ING doesn't have enough capital,'' said Joost de Graaf, a senior portfolio manager who helps oversee about $650 million at Kempen Capital Management in Amsterdam. Kempen doesn't hold ING stock.

Saab AB dropped 7.6 percent to 85 kronor after the Swedish maker of the Gripen fighter plane reported a third-quarter net loss as customers delayed military projects and orders, prompting the company to deepen its planned cost cuts and eliminate 500 jobs.

Safran SA added 2.1 percent to 9.34 euros. Europe's second- biggest aircraft-engine maker said nine-month sales rose 1.5 percent, driven by higher shipments of aircraft equipment such as carbon brakes.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net