European shares rise in largest rally in 15 months

European shares posted their largest one-day rise in 15 months yesterday, recovering some of last week's losses as a liquidity injection from central banks soothed investor nerves, while bank stocks rallied.

Bank stocks were the top performing sector on the European equities market. Royal Bank of Scotland, HSBC and Barclays were all among the top weighted gainers on the FTSEurofirst 300, pushing the broader European banking sector up 2.5 per cent.

The FTSEurofirst 300 index of top European shares closed up 2.29 per cent at 1,513.27 points in its largest daily percentage gain since May 2006.

The index shed three per cent on Friday in its worst one-day slide in over four years.

"It's going to be volatile, as credit markets sort themselves out, but we believe that the underlying strength of the global economy and attractive global equity valuations will stop markets short of meltdown," said Tim Harris, markets strategist at JPMorgan Private Bank.

The FTSEurofirst 300 is up 1.7 per cent so far this year, having briefly wiped out all of this year's gains on Friday, but is still nearly eight per cent down from this year's peak at 1,635.6. A host of central banks pumped extra cash into the banking system last week and yesterday to stave off sudden rises in overnight lending rates, helping soothe investor concern about access to liquidity after a number of financial institutions revealed exposure to subprime market turmoil last week.

Mining stocks rose sharply, led by near-11 per cent rises in the shares of copper miners Kazahkmys and Antofagasta, while Anglo American rose 8.3 per cent and Rio Tinto rose seven per cent. The DJStoxx index of European basic resources companies rose six per cent. Morgan Stanley said in a note it was time to start buying shares, its first asset allocation shift since January.

"The risk-reward of buying equities on a 6-12 month view is much better now than a few months ago," strategist Teun Draaisma wrote, changing the bank's view of equities to "overweight" from "neutral", downgrading cash and keeping bonds underweight.

"Companies still have strong balance sheets, strategic M&A has further to go, sovereign wealth funds have significant amounts of cash to buy equities with, we see no recession coming, emerging markets are in great financial shape, the earnings yield/bond yield gap is still positive," he said.