European stocks closed sharply higher yesterday as investors returned to the market after crude prices slipped and data showed the US economy expanded at a much stronger rate than reported earlier.
The banking sector was the biggest weighted sectoral gainer on the pan-European FTSEurofirst 300 index that ended 1.5 per cent higher at 1,190.91 points. But the benchmark is still down 21 per cent this year.
Sentiment improved after the US data lifted optimism about a recovery in the economy, which has been under pressure following troubles in the US housing market.
Figures showed the US economy expanded at a 3.3 per cent annual rate in the second quarter, as consumer spending and net exports were more robust than initially estimated and inventories fell less sharply.
Also, the number of US workers filing new claims for jobless benefits fell by 10,000 last week, but remained at elevated levels indicating a weak labour market.
"People got really surprised by the second-quarter GDP revision and jobless claims, which also dropped surprisingly," said Franz Wenzel, strategist at AXA Investment Managers.
"But we are not out of the woods. For that we would definitely need something like a big relief on the inflation front," Paris-based Wenzel said.
French bank Credit Agricole was one of the top gainers on the FTSEurofirst 300, jumping 8.9 per cent despite posting a 94 per cent fall in quarterly profit.
"People think that they've got the bulk of the writedowns out of the way and results in the third and fourth quarters will be better," said a London-based trader.
Other banks also advanced, with Barclays rising 5.8 per cent, UBS AG rising 4.6 per cent, HBOS jumping 4.2 per cent and Royal Bank of Scotland advancing 3.7 per cent.
Insurance shares also gained on a broader market rally, despite a slide of 8.8 per cent in shares of Swiss Life after a profit warning and first-half earnings that missed analysts' forecasts due to writedowns.
Across Europe, Britain's FTSE 100 closed up 1.3 per cent, Germany's DAX up 1.6 per cent and France's CAC 40 up 2 per cent.
Investors weathered a volatile August on financial markets by slightly lifting their stock holdings but kept exposure well below average, Reuters polls showed yesterday.
Shares in oils and gas companies tracked crude prices, which fell 2.4 per cent after the International Energy Agency pledged to help out with additional supply if Tropical Storm Gustav damaged oil installations in the Gulf of Mexico.
BP fell 0.7 per cent, Royal Dutch Shell declined 0.1 per cent and Tullow Oil fell 0.6 per cent.
Shares in European retailers were also down on concerns that attempts to lure price-conscious shoppers may squeeze company profit margins.
Dutch supermarket group Ahold was four per cent lower after it reported a 14.2 per cent drop in second-quarter profit, with margins dented by price cuts and promotions.
But J. Sainsbury jumped nearly eight per cent as traders cited renewed talk of a bid for Britain's third-largest supermarket chain. Sainsbury said it would not comment on the talk.
Daimler rose 0.8 per cent, BMW gained 2.2 per cent and Peugeot was up 1.5 per cent.