(Updates with Wall Street outlook)
By Mike Dolan
LONDON, June 19 (Reuters) - European stocks rallied on
Thursday after unexpected news of a British shopping spree last
month offset early gloom about the banking sector and sent
sterling and UK market interest rates surging.
Wall Street also looked set for a positive start.
British retail sales soared in May by 3.5 pct, their fastest
monthly rate since the series began in 1986 driven by record
sales of food and clothes.
The figures, in contrast to an expected 0.1 percent fall,
are likely to reinforce market expectations that UK interest
rates will go up before they go down -- even in the face of
policymakers' concern about a sharp slowdown in growth.
But they also serve to lift some of the gloom about the
state of major western economies, where talk of consumer
retrenchment and deep recession have been rife in recent weeks.
"I'm staggered," aid Philip Shaw, economist at Investec.
"The figures are just completely on a different plane compared
to market expectations."
The UK sales shock reversed early losses on the FTSE 100
<> and the pan-European FTSEurofirst 300 index <.FTEU>,
with both flat on the day after losing as much as 0.5 percent
shortly after the open.
British retailers Tesco <TSCO.L> advanced 1.5 percent.
Sterling rallied to around $1.9700 <GBP=>, up more than half
a percent on the day. It had traded at $1.9629 before the
announcement.
It also climbed against the euro, pushing the single
currency down 0.8 percent to 78.62 pence <EURGBP=>.
Gilt futures erased 15 ticks of gains to trade 30 ticks
lower on the day at 103.84 <FLGU8>.
"The (retail numbers) came out very strongly, surprisingly
so, a massive jump in the headline and pretty much across the
board and we see a particular strength in clothing and
footwear," said Daragh Maher, senior currency strategist at
Calyon.
"For now sterling bounces on it. But in terms of its meaning
for policy, I think they (the Bank of England) would want to see
a confirmation that this isn't some weird aberration."
BANK GLOOM
The news lifted all European markets, where stocks had
opened weaker.
But banks continued to be the biggest losers.
The UK dominated the banking story too, with British lender
HBOS <HBOS.L> warning of housing-related writedowns and hitting
shares in Royal Bank of Scotland <RBS.L>, Barclays <BARC.L> and
Alliance & Leicester <ALLL.L>. All fell between 1.5 and slightly
more than 6 percent.
In continental Europe, BNP Paribas <BNPP.PA> was down 2.3
percent and UBS <UBSN.VX> lost 2.7 percent.
"They now seem to be continuously coming out with more bad
news," said Justin Urquhart Stewart, a director at Seven
Investment Management.
Japanese markets and bank stocks also fell sharply earlier
on banking concerns, with the Nikkei 225 <> dropping 2.2
percent and Japanese bank stocks taking a beating.
DOLLAR UP BROADLY
The dollar <.DXY> rallied broadly, benefiting in part from
the Swiss National Bank's decision to keep its interest rates on
hold which stalled the Swiss franc's overnight advance.
Rising money market rates and growing inflationary pressures
had led a significant minority of investors to expect a SNB rate
rise from 2.75 percent, taking the Swiss franc to 17-year highs
against the yen overnight. But the rally fizzled out as the bank
declined to act.
Analysts said that investors might see the SNB decision as a
reason to scale back expectations for European Central Bank rate
rises after an expected increase in July.
"The SNB faces the same sorts of difficulties that central
banks in the rest of the developed world seem to be facing, with
regards to inflation pressure building and the global growth
picture looking less certain," BNP Paribas senior currency
strategist Ian Stannard said.
"Traditionally the SNB has liked to lead the ECB so there
might be some scaling back of market expectations for the
ECB...Interestingly, we've seen even some of the more hawkish
members of the ECB dampen down expectations further out in the
year," he added.
The move briefly boosted European government bonds
<DE10YT=RR> before the UK retail sales shock reversed that move.
Elsewhere, oil prices eased. U.S. crude <CLc1> lost 65 cents
to $136.03 a barrel.
(Additional reporting by Jeremy Gaunt, Amanda Cooper, Veronica
Brown and Ikuko Kao; Editing by Ron Askew)
