Tesco may lift UK retail shares

Strong holiday sales by other retailers buoy hopes that retail, miners and banks will show recovery is for real.

Tesco, the British grocery store chain, will be a focus for the retail sector this week after the release of unexpectedly strong sales for the Christmas season by its rivals Waitrose and Sainsbury. It is hoped that Tesco, the UK's largest retailer, will show in a trading update scheduled for Tuesday that it built on the momentum in the lead-up to Christmas with a boom in sales spilling into the new year.

In the 13 weeks to November, Tesco reported a rise of nearly 9 per cent in group sales, due to a strong performance from outside the UK. In the UK, sales grew a modest 2.8 per cent compared with the same period the year before, excluding sales as a result of changes to the company in that time. Waitrose, which is part of the John Lewis Partnership, reported a rise of 13.6 per cent in sales over the Christmas season. Meanwhile, Sainsbury posted a surprise sales gain of 4.2 per cent for its third quarter.

Greggs, which will report on Wednesday, caters for cash-strapped diners. The baker performed well in the period to the middle of October, but it has sounded a note of caution over consumer sentiment and spending during the Christmas season. European stocks, meanwhile, rallied in the first week of trading this year, with the Dow Jones Stoxx 600 index posting a 15-month high on signs that economies are recovering from the global downturn.

The mining giant Rio Tinto led a measure of basic resource shares higher for a fourth week. Allied Irish Bank posted the largest surge in Europe after Brian Lenihan, the Irish finance minister, said the capitalisation of the country's banking system would be resolved by the end of the first quarter. The DJ Stoxx 600 index added 2.1 per cent to 259.15 last week, a fourth straight weekly advance and the longest stretch of gains in five months.

The regional benchmark has surged 64 per cent since March, boosted by record-low interest rates in the US and Europe, and about US$12 trillion (Dh44.07tn) of commitments from governments worldwide to revive credit markets and stimulate growth. "Of all the asset classes, equities look the most attractive," said Kevin Gardiner, the head of investment strategy at Barclays Wealth, which has about $215 billion under management.

"Even though the economic recovery may be lacklustre, the level of profits growth will underpin more gains in stocks." National benchmark indexes gained in all 18 western European markets last week. The UK's FTSE 100 rose 2.2 per cent and Germany's DAX advanced 1.4 per cent. France's CAC 40 index added 2.8 per cent. A Chinese purchasing managers' index, a barometer of manufacturing, gained last month, data compiled by HSBC and Markit Economics show.

And the US Institute for Supply Management's manufacturing index rose to 55.9 last month, the highest level in more than three years, topping economists' forecasts of 54.3. A measure of European manufacturing, based on a survey of purchasing managers in the 16-nation euro area, increased for a third month in December, Markit reported last week. And a gauge of UK manufacturing from the chartered institute of purchasing and supply and Markit, climbed to the highest in 25 months.

Revisions showed that US payrolls increased in November for the first time in almost two years, while the American economy unexpectedly lost 85,000 jobs last month. Payrolls decreased last month after a November gain of 4,000, the labour department reported on Friday. "Markets are more looking for proper earnings and corporates' ability to deal with the macro environment," said Stefan Moeckel, a fund manager at WestLB Mellon Asset Management in Germany.

"We will not need an economy that goes through the roof. Corporates are very much streamlined to benefit even from an economy that does not reach the growth rate that we had in 2006 or 2007." Rio Tinto, the world's third-largest mining company, added 7.3 per cent, while Xstrata rallied 11 per cent and Antofagasta gained 3.2 per cent. Allied Irish surged 38 per cent. Mr Lenihan said the Irish government would provide more capital to the country's banks if needed and that he aimed to resolve the issue this quarter.

"This is sooner than we would have anticipated," said Sebastian Orsi, an analyst at Merrion Stockbrokers in Dublin. "Resolving the issues sooner rather than later would be positive." Banks posted the biggest gain among the 19 industry groups on the DJ Stoxx 600 except for basic resources. Technology stocks were the third-best performers as Citigroup strategists on Wednesday upgraded their rating on the sector to "overweight".

Sap, the world's biggest maker of business-management software, climbed 4.1 per cent. Nokia, the world's largest maker of mobile handsets, added 3.7 per cent. GlaxoSmithKline fell 2.9 per cent after Belgium prepared to join Germany and France in cutting its order for the drug maker's swine-flu vaccine. * with Bloomberg