Investors in European shares are hoping the next three months will bring more cheer than the quarter just ended. Despite starting in a blaze of glory with the launch of the euro and a burst of mergers and acquisitions activity, bourses are looking a little jaded, observers agree, even without the potential of the war in the former Yugoslavia to cause further damage in the next few weeks.

The FTSE Eurotop 300 index of Europe's leading stocks rose a modest 6.44 per cent in the first quarter of 1999 to 1,258.89, while the FTSE Eurotop 100 index rose 7.2 per cent to 2,920.06.

The FTSE Ebloc index of shares in euro-zone countries gained 3.32 per cent to 1,031.48.

These performances pale in comparison with the Dow Jones Industrial Average, which recently broke through the 10,000 barrier before retreating a little. And they are compounded by the weakness of the euro - a trend not predicted when it was launched - which fell 8 per cent against the US dollar in the first three months of its existence.

Part of the explanation for the trend in European markets has been a sharp reversal in the recent fortunes of the sectors - pharmaceuticals, telecommunications and media - that led an early surge in performance. Telecoms, especially, have been knocked off their perch by the energy sector, which outperformed in March by 15 per cent, according to Salomon Smith Barney.

Mr Mark Howdle, European market strategist at Salomon, attributes the reversals to rising bond yields, which are bad news for growth sectors.

If the remarkable rate of growth of the US economy continues, oil prices keep rising and the Kosovo conflict escalates, bond market yields will rise further, he says.

"This should be a serious concern for equity investors, since current high valuation multiples are closely linked to exceptionally low bond yields," Mr Howdle writes in his April commentary on euro-zone markets.

"Since we believe that bond market movements explain the recent sell-off in growth stocks, we suspect that further rises in bond yields could produce more of the same reaction."