European Stocks Fluctuate; Shell, K+S Advance, Swedbank Drops

By Adam Haigh

May 20 (Bloomberg) -- European stocks fluctuated between gains and losses as concern a two-month equity rally is poised to wither overshadowed gains by oil and chemical producers.

Royal Dutch Shell Plc climbed as crude traded above $60 a barrel. K+S AG rose 7.7 percent as HSBC Holdings Plc recommended the shares. Air France-KLM Group jumped 10 percent after Europe’s biggest airline reported a narrower-than-estimated loss. Swedbank AB led a measure of European bank shares lower for the first time in five days, dropping 3.1 percent.

The Dow Jones Stoxx 600 Index was little changed at 210.72 as of 1:04 p.m. in London. The regional benchmark has advanced 33 percent from this year’s low on March 9 as speculation mounted that U.S. government measures to purchase illiquid assets from banks will pull the global economy out of recession.

Stocks will pull back to their March levels as a rally led by the most highly shorted stocks ends, according to David Rosenberg, chief economist and strategist at Gluskin Sheff.

“As doubts emerge over whether in fact the green shoots amount to anything more than dandelions, it now looks as though the major averages are about to embark on the fabled retesting phase towards the March lows,” Rosenberg, a former Merrill Lynch & Co. economist, wrote in a report dated yesterday.

Shell, Europe’s largest oil producer, gained 2 percent to 1,668 pence. BP, the second-biggest, added 1.3 percent to 516 pence. Oil rose for a third day before a report forecast to show that U.S. crude inventories dropped from their highest level in nearly 19 years.

K+S, Air France

K+S rallied 7.7 percent to 53.73 euros as HSBC upgraded the shares to “outperform” from “neutral.” There is “strong underlying demand in the Potash industry,” HSBC analyst Jesko Mayer-Wegelin wrote in a report. Europe’s largest producer of potash used in fertilizers led a rally among chemicals companies, which posted the steepest advance of all 19 industry groups on the Stoxx 600.

Air France surged 10 percent to 11.18 euros. The net loss for the year ended March 31 was 814 million euros ($1.1 billion), while analysts had predicted a loss of 902 million euros.

Swedbank, the largest lender in the Baltic states, slid 3.1 percent to 54.50 kronor. KBC Group NV sank 1.9 percent to 14.86 euros. A measure of banks shares on the Stoxx 600 fell 1 percent after climbing for four days.

‘Defensively Positioned’

“From this point we have two tasks: to determine whether the economic recovery is really real and whether we are defensive enough if it doesn’t pan out as a full recovery,” said Gunnar Miller, Frankfurt-based global head of European sector research at RCM, where he helps oversee about $176 billion. “With equities we want to remain relatively defensively positioned to see how this pans out,” he told Bloomberg Television.

U.S. and European options are trading at their lowest levels since Lehman Brothers Holdings Inc.’s collapse last year after benchmark stock indexes rallied more than 33 percent over the last 10 weeks. The VIX, as the Chicago Board Options Exchange Volatility Index is known, and Europe’s VStoxx Index have both retreated to their lowest levels since Sept. 12, the last trading day before Lehman filed the biggest bankruptcy in U.S. history.

The cost of insurance against companies defaulting on debt and money market rates also indicate the worst of the recession may have passed. The London interbank offered rate, or Libor, for three-month loans in dollars fell more than three basis points to 0.72 percent today. The cost of protecting European corporate bonds from default slipped, according to traders of credit-default swaps.

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