European stocks hit 2-week highs

Expectations for strong corporate earnings growth help push markets higher; hotel stocks advance after Blackstone buys Hilton.

LONDON (Reuters) -- European shares ended strongly for the second straight session on Wednesday, with a key benchmark hitting its highest closing level in two weeks, but volume was stifled by a U.S. holiday.

Travel and leisure stocks were standout gainers, with hotel group Accor rallying 10 percent and Intercontinental Hotel up 4 percent as private equity firm Blackstone Group (Charts) agreed to buy Hilton Hotels (Charts, Fortune 500) in a deal valued at $26 billion, spurring talk of further industry consolidation.

The pan-European FTSEurofirst 300 index rose 0.4 percent to 1,620.2, its strongest close since June 20, and up 9 percent so far this year, boosted by corporate takeovers and strong earnings. The index jumped 16 percent in 2006.

About 1.8 billion shares were traded, about half the average daily volume traded so far this year.

Fund managers said strong corporate profit growth was supporting stocks.

"Recent highs in European equities are driven by expectation of European earnings growth picking up as corporate investment remains strong and unemployment rates continue to fall," said Vincent Devlin, investment director of European equities at Scottish Widows Investment Partnership.

Around Europe, Germany's 30 share DAX index added 0.3 percent while UK's FTSE 100 and France's CAC 40 both rose 0.5 percent.

Focus on rates

Interest rates will be eyed Thursday with the European Central Bank expected to hold rates at 4 percent, while the Bank of England is forecast to raise rates a quarter percentage point to 5.75 percent.

In June, concerns over rising interest rates and costlier credit hit European stocks as investors worried that higher borrowing costs might derail M&A activity.

"M&A is still alive," said Philip Isherwood, a strategist at Dresdner Kleinwort. "With the maturity of the profit cycle, the concept of cost synergies appeals to management, because companies are not willing to let their profit growth slow down."

Among gainers, Volkswagen added 1.3 percent after Europe's largest carmaker reported a 15 percent rise in car sales in the United States in June, marking its strongest overall sales month since August last year.

British Airways rose 5.3 percent after the airline reported strong figures for its premium class seats in June.