HSBC Sparkles as European Stocks Rise for Third Day

European shares rose for the third straight day on Wednesday led by British bank HSBC, which reported higher profits, but analysts and traders said sentiment was fragile and big investors cautious.

The pan-European FTSEurofirst 300 index index closed 0.44 percent higher at 1,522.70 points. The index has risen a total of 0.74 percent this week.

Economic growth in the euro zone rebounded more strongly than expected in the third quarter, data showed, but economists predicted slower growth ahead, with implications for corporate profits, which ultimately determine the trend in share prices.

"Looking ahead, the Eurozone will likely increasingly struggle," Bank of America said. "A stronger euro coupled with slower demand from the United States will likely weigh."

Morgan Stanley said the credit crisis and its impact on bank lending, but also the 5 percent effective appreciation of the euro since the beginning of the year and the oil price spike, were all negative for domestic demand in the euro zone.

"The impact of a stronger euro is not weaker exports, but weaker profits," Morgan Stanley added.

Bear Stearns said, "Judging by the way stocks have been trading so far this week one could be forgiven for thinking that all was well in the world all of a sudden."

"Risk aversion apparently seems to have been downgraded to a lower scale, stocks have rallied and safe haven trades into government debt have gone into sharp reverse. They may think it is all over, but it is not," the bank said in a strategy note.

A Germany-based trader said institutional investors were cautious.

"They don't seem to know which way the markets will go ... it seems that the sentiment is for the stock markets to remain stable, but the risks are probably more to the downside than to the upside," the trader said, citing higher oil prices and the weak U.S. dollar.

Reassuring Report

Shares in HSBC, Europe's biggest bank, rose 2.8 percent as its trading update reassured investors it had not suffered significant write downs on risky U.S. mortgage-backed debt.

"HSBC's investment bank has avoided the scale of write downs suffered by some of its peers," Redburn Partners said in a note.

"Given its large diversified and, hence, defensive nature and attractive safe dividend yield ... we maintain our 'market perform'," Keefe Bruyette and Woods said in a note.

Some other bank shares also rose, notably Swiss UBS, up 2.8 percent, and Dutch-Belgian Fortis, up 2.1 percent. Holding back a broader rally in financials, British mortgage bank Alliance & Leicester fell 3 percent on renewed talk of funding concerns, traders said.

Among industrials, Finmeccanica rose 3.8 percent after the Italian aerospace and defense group's earnings report.

"We feel the stock has a low rating given its prospects and potential," Barclays Wealth said. "While Finmeccanica has modest debt, it is expected to sell some non-core assets, which provides it with firepower to build the group further with acquisitions," Barclays Wealth added.

Credit Suisse reiterated its "outperform" stock rating.

ArcelorMittal rose 1.6 percent as the world's largest steelmaker reported forecast-beating results and raised its dividend.

Mining group Rio Tinto was another prominent gainer, up 2.5 percent, after UBS said in a research report that BHP Billiton could afford to add a $27 billion cash sweetener to its $140 billion offer for Rio Tinto.

"We see further consolidation on the cards in the mining sector, and expect prices to remain high, especially for non-listed commodities such as iron ore," Commerzbank said.

Among blue-chip losers, Vodafone fell 2 percent, making telecoms the day's worst performing DJ STOXX sector index with a slide of 1.1 percent.

"Shares in Vodafone are down on profit-taking following an upbeat set of interim numbers and full-year outlook yesterday," Killik & Co said in a note.