Travel and leisure stocks gained 1.1 percent, led by
a 6.9 percent jump in Ryanair after it reported
expectation-beating earnings for the past year.

The pan-European FTSEurofirst 300 closed 0.3
percent higher at 1,252.09, its highest close since June 2008.
Trading was quiet because stock markets in Switzerland, Austria,
Denmark and Norway were shut for a holiday.

Car makers were the biggest sectoral gainers. They
rose 2.3 percent to take gains since Friday to 5.3 percent, when
the European car market snapped an 18-month streak of
contraction.

Car makers such as Volkswagen BMW and
Daimler joined airline Lufthansa as the
strongest gainers on the outperforming German blue-chip DAX
index, which rose 0.7 percent after it bounced off
strong support at 8,400.

“The 8,400 (level on the DAX) was previously resistance, and
it has bounced off it today. If it breaks below there we could
see more selling, but for today it was a good place to buy the
dips,” Fawad Razaqzada, technical analyst at GFT, said.

In contrast, the Spanish IBEX suffered from
profit-taking after it breached but failed to hold above its
March high.

“Looking at the IBEX index, however, the 8,600 level has
been a resistance which it has struggled to get through, and so
we’re seeing some profit-taking at these levels,” Razaqzada
said.

Miners were the biggest drag on European shares on a
sectoral basis, with gold miners down due to concerns over the
gold price and industrial unrest.

“The main drag has been the basic resource sector as
commodity prices once again come under pressure as concerns
about falling prices and higher unit labour costs in South
Africa weigh on the downside,” Michael Hewson, senior market
analyst at CMC Markets, said.

STOXX 600 Basic Resources companies, mainly
populated by miners, fell 0.5 percent. ENRC was one of
the biggest fallers in response to uncertainty over the price of
a potential takeover.

The FTSE 100 closed up 35.26 points, or 0.5 percent,
at 6,723.06, just 0.1 percent off October 2008′s closing high
and marking the index’s fourth successive week of gains.

Banks combined to add 18 points to the index, benefitting
from an upgrade by UBS and led up by Lloyds and RBS
.

The banks, which both received state help during the
financial crisis, gained 3.2 and 5.7 percent respectively after
Lloyds broke through the 61.2 pence level which the government
regards as breakeven on its 20.5 billion pound ($31 billion)
rescue.

“The prospect of both of those banks being released from
the taxpayers clutches is helping sentiment in the whole area,”
Mike van Dulken, head of research, said.

Friday saw a volatile day of trade as options expired
mid-morning, with buying pressure to lift the index above 6,650
and 6,700 levels, where there were a lot of open “call”
positions.

As a right to buy the index at a certain level, these
positions would be worthless if the index was below that level
when the options expired.

Options expiry has seen investors abandon hedges against
falls in European indexes, and extend bets on future rises in an
asset class which has rallied on the back of easy monetary
policy.

Friday’s session began on a weaker note after a Federal
Reserve official said the central bank could begin to slow its
monetary stimulus this summer.

However good U.S. data on Friday was received well by the
market, despite the possibility that it will accelerate the
Fed’s tapering of purchases.

“People are a bit unsure about how to read the Fed
yesterday, because this whole market rally is caused by central
bank intervention, and they’re beginning to hint that it won’t
be there… but it will only be withdrawn if the economy is
good,” Joe Rundle, head of trading at ETX Capital, said.

“The momentum is completely on the upside, and people are
just trying to get into this market now… Any little pullback
is a great opportunity to get back involved.”

On the down side, Goldman Sachs downgraded food and
beverages to underweight and personal and household to neutral.
These sectors combined with other defensive plays in utilities
and health care to be the biggest weights on the index.

The top individual faller was miner ENRC, which
slid 8 percent in afternoon trade after a report that the
group’s trio of founding shareholders had submitted a letter
detailing an offer below 300 pence per share.

(Editing by Toby Chopra)

By 11:31 a.m., the FTSE 100 was up 21.03 points, or 0.3 percent, at 6,708.83, having dipped to 6,682.04 earlier in the session.

As options expired mid-morning on Friday, there was buying pressure to lift the index above 6,650 and 6,700 levels, where there were a lot of open “call” positions. As a right to buy the index at a certain level, these positions would be worthless if the index was below that level when the options expired.

“I think the move that we’ve seen in mid-morning trade is definitely options expiry driven, pushing up towards the 6,700 level,” David Jones, market analyst at IG Index, said.

“Whenever we’ve the FTSE dip back towards 6,660 over the last couple of days there have been buyers coming back in, and these markets are still bullish despite the late plunge we saw in late U.S. trade yesterday.”

U.S. stocks fell on Thursday, hitting UK stocks in early trade, after a Federal Reserve official said the central bank could begin to slow its monetary stimulus this summer.

It was growth sensitive stocks, however, which led the recovery, with basic materials, energy and financial stocks combining to add 28 points to the index.

Helping to lift the mood around these riskier sectors was Lloyds, up 2 percent, taking it through 61.2 pence, which the government regards as breakeven on its 20.5 billion pound ($31.4 billion) rescue of the bank.

“Plenty of momentum based investors will have seen the move through 60 pence earlier in the week as a big level… so there’s a renewed appetite to be a buyer of Lloyds,” Jones said.

Helping so-called “cyclical” stocks higher was a rotation out of defensive plays which had outperformed year to date.

Goldman Sachs downgraded food and beverages to underweight and personal and household to neutral, and these sectors combined with other defensive plays in utilities and health care to be the biggest weights on the index.

“A few brokers have today downgraded the Food & Beverage sector today… The sector is now testing the bottom end of its channel from the start of 2011 – and with the earnings multiple still at 19x 2012 price-to-earnings – there is still more downward reversions to come,” Nick Xanders, who heads up European Equity strategy at brokerage BTIG, said in a note.

By 1031 GMT, the FTSE 100 was up 21.03 points, or
0.3 percent, at 6,708.83, having dipped to 6,682.04 earlier in
the session.

As options expired mid-morning on Friday, there was buying
pressure to lift the index above 6,650 and 6,700 levels, where
there were a lot of open “call” positions. As a right to buy the
index at a certain level, these positions would be worthless if
the index was below that level when the options expired.

“I think the move that we’ve seen in mid-morning trade is
definitely options expiry driven, pushing up towards the 6,700
level,” David Jones, market analyst at IG Index, said.

“Whenever we’ve the FTSE dip back towards 6,660 over the
last couple of days there have been buyers coming back in, and
these markets are still bullish despite the late plunge we saw
in late U.S. trade yesterday.”

U.S. stocks fell on Thursday, hitting UK stocks in early
trade, after a Federal Reserve official said the central bank
could begin to slow its monetary stimulus this summer.

It was growth sensitive stocks, however, which led the
recovery, with basic materials, energy and financial stocks
combining to add 28 points to the index.

Helping to lift the mood around these riskier sectors was
Lloyds, up 2 percent, taking it through 61.2 pence,
which the government regards as breakeven on its 20.5 billion
pound ($31.4 billion) rescue of the bank.

“Plenty of momentum based investors will have seen the move
through 60 pence earlier in the week as a big level… so
there’s a renewed appetite to be a buyer of Lloyds,” Jones said.

Helping so-called “cyclical” stocks higher was a rotation
out of defensive plays which had outperformed year to date.

Goldman Sachs downgraded food and beverages to underweight
and personal and household to neutral, and these sectors
combined with other defensive plays in utilities and health care
to be the biggest weights on the index.

“A few brokers have today downgraded the Food & Beverage
sector today… The sector is now testing the bottom end of its
channel from the start of 2011 – and with the earnings multiple
still at 19x 2012 price-to-earnings – there is still more
downward reversions to come,” Nick Xanders, who heads up
European Equity strategy at brokerage BTIG, said in a note.

The Euro STOXX 50 index of top euro zone shares
has gained nearly 10 percent since a similar monthly expiry in
April, leaving almost all the “put” option bets by investors to
speculate on or protect themselves against stock falls set to
expire worthless.

As investors cut their positions in puts, however, they have
little defence in options if the rally does lose steam.

“The overall trend is bullish, and we don’t feel that we
need to hedge the portfolios at this point, even if puts are
very cheap,” Diamant Bleu Gestion fund manager Christian Jimenez
said.

“If things turn awry, we’ll just cut the positions and cash
in the gains.”

Over the month, demand to buy “call” options – bets the
market will rise – has increased and the put-call ratio fall
from a mid-April high of 2.3 to 1.

Abundant central bank money has lured investors to equities
from other asset classes, reducing demand from speculators to
bet on falls. However, concerns remain over Europe’s economic
health and corporate earnings have been lacklustre, meaning
structural demand from funds to hedge holdings is also low.

The most recent Bank of America Merrill Lynch fund manager
survey showed many funds are “underweight” their investment
benchmarks on the euro zone, reflecting this more cautious view.

“Investors remain underweight Europe, and so demand for puts
has been very low in general,” Kokou Agbo-Bloua, European head
of equity and derivative strategy at BNP Paribas, said.

“(Instead) there’s been more demand for calls to play a
catch-up of the Euro STOXX versus the S&P, Nikkei
, FTSE or SMI that have done very well so
far,” he added, referring to other leading global indexes.

Agbo-Bloua said he expected more holders of calls would
renew their options on stocks rising after Friday’s expiry
rather than exercise their right to buy.

The UK’s FTSE 100 index is up around 16 percent this year,
while the Swiss SMI index is up 22 percent.

One consequence of the expected preference to “roll over”
calls rather than puts is that the market could become
vulnerable to a sell-off, as few investors would hold the
insurance against such a move that can mitigate its scale.

The Euro STOXX 50 Volatility Index, used to measure
the cost of protecting stock holdings against market falls,
dropped to a two-month low on Thursday.

“If the market does now turn, there’s far fewer puts in the
market… The cost of protection is really cheap, and for the
people who want to defend against a sharp fall in the market
it’s almost never been cheaper,” Jeremy Batstone-Carr,
strategist at Charles Stanley, said.

Shares in Severn Trent leapt 15.1 percent after it
confirmed it had been approached by a consortium led by Canadian
infrastructure investor Borealis and the Kuwait Investment
Authority.

Rival United Utilities – which has also been the
subject of bid speculation – was up 4.1 percent and traders said
it could attract further interest.

“The focus this morning is on the prospect of a bid for
Severn Trent from Canada, and you wonder if Britain is going to
be left with any utilities that haven’t been taken over,” Knight
Capital director Ioan Smith said. “Particularly with the
collapse of the Betfair deal, the market can get excited about
some fresh M&A activity in the works.”

Mid-cap Betfair fell 6.7 percent after it ended
takeover discussions with CVC Partners after the private equity
firm said it would not make a third revised offer for the online
gambling company.

By 0758 GMT, the FTSE 100 was flat, just 2.41 points lower
at 6,629.35, with utilities adding 5.5 points to the index.

Mining stocks fell 1.4 percent, taking their
decline to the year to 19.2 percent and helping knock 7.6 points
off the index, as Monday’s weak data out of China was compounded
by fresh industrial unrest in Africa.

A wildcat strike halted work at South African mid-cap
platinum miner Lonmin’s operations, and triggered falls
in South African-focused blue chip peers Anglo American
and Randgold Resources

Rio Tinto fell for a second day as protestors in
Mozambique blocked a coal export railway for a second day.

“Fears over China growth have seen the sector down so far
this year, but these strikes aren’t helping,” Zeg Choudhry, head
of trading at Northland Capital Partners, said.

“I was going to be a buyer of Lonmin today (following their
results yesterday) until I came in and saw the news in South
Africa.”

(Editing by Catherine Evans)