European shares rebounded to close one per cent higher yesterday, spurred on by a rally in banking stocks like Deutsche Bank, which rose on hopes it will kick off a round of consolidation in the industry.
Deutsche Bank closed 3.1 per cent firmer on reports it is discussing a possible bid for state-controlled Postbank, a move analysts said could spur mergers in the crowded German market.
A better-than-expected 12 per cent rise in first-quarter earnings boosted German utility RWE 3.7 per cent but Ahold, the world's third-largest retailer, shed 3.6 per cent as the sale of assets and a weak dollar took a toll on first-quarter sales.
The FTSE Eurotop 300 index of pan-European blue chips ended 1.1 per cent firmer at 979.6 points on solid turnover of around three billion euros, while the narrower DJ Euro Stoxx 50 index rose 1.4 per cent to 2,721.1 points.
The Eurotop 300 had tumbled as much as six per cent in the previous three weeks on fears US interest rates will soon rise and dampen global growth.
"Personally, I think the market has over-reacted. The reason why there will be rate rises is because economic growth is so much stronger than previously anticipated," said Kevin Lilley, a European fund manager at Royal London Asset Management.
Valuations on equities were also very supportive, and against bonds, equities looked cheap, he said.
"Basically I think it's wrong to be going wholesale into defensive stocks," Mr Lilley said, adding that recent purchases included tech heavyweight Ericsson.
However, opinion is divided and others see the impending rate hikes as a reason to reshuffle portfolios to reflect the maturing economic cycle.
"We continue to look for quality earnings growth - growth defensives (like) beverages, pharmaceuticals, food retail, some of the staples," said Karen Olney, a strategist at Dresdner Kleinwort Wasserstein.
"We'd be moving away from cyclicals, whether early cyclicals like electronics or engineers, and late cyclicals. We're still negative on mining but we see oils as a defensive, so would still be sticking with them although they've already had a good run."
In New York, the blue-chip Dow Jones industrial average was 0.4 per cent firmer at 10,026.2 points, while the Nasdaq Composite Index rose 1.7 per cent to 1,929.1 points by 1616 GMT.
Around Europe, London's FTSE 100 closed 1.4 per cent higher, while Paris's CAC-40 ended up 1.5 per cent. In Zurich, the SMI rose 1.4 per cent and Frankfurt's DAX closed 1.7 per cent firmer.
Gains were broad-based, with every sector closing in positive territory but banks accounted for about 40 per cent of the Eurotop 300's rise. Britain's HSBC and Royal Bank of Scotland both rose around 2.5 per cent after sharp falls on Monday.
German luxury car maker Porsche led a bounce in auto stocks, adding 4.5 per cent to €528.01 after announcing plans to launch its new 911 model across Europe in July. Deutsche Bank upgraded the stock to "buy".
France's Capgemini featured amid a strong performance from technology stocks, climbing six per cent to €29.18 after the computer consultancy firm reassured investors its sales will grow in the second half.
Among the few stocks to decline, the world's leading wind turbine maker, Vestas Wind, ended 2.9 per cent lower at 84.50 crowns after announcing plans for a share issue.