European stocks rose on Tuesday as signs of economic recovery in the euro zone helped soothe investor worries a day after the return of political risks in Spain and Italy sparked a sell-off. Dutch telecom operator KPN bucked the trend, sinking 16 percent after the debt-laden company unveiled a rights issue of 4 billion euros ($5.4 billion) in an attempt to avoid credit rating downgrades.
The FTSEurofirst 300 index of leading European shares closed 0.3 percent higher at 1,154.47 points. The euro zone's blue-chip Euro STOXX 50 index gained 1 percent to 2,651.21 points. It rebounded after a 3.1 percent slide on Monday sparked by worries over a corruption scandal in Spain and polls showing Italy's former prime minister Silvio Berlusconi regaining ground before elections this month. Eurozone banks featured among the top gainers, with Spain's Banco Santander up 3 percent and BBVA up 2.3 percent, while France's BNP Paribas added 1.9 percent.
Investors were reassured after figures showed the euro zone economy is recovering, albeit slowly. Markit's euro zone composite PMI, seen as a good indication of economic growth, climbed to a 10-month high for January and was slightly above the preliminary reading.
"Yesterday's spotlight on southern Europe was just an excuse to book profits and catch our breath. The trend is still positive, and clients are slowly coming back to equities," Kepler Capital Markets sales trader Patrice Perois said.
"US earnings are much better than expected, there is no worry on that front, and apart from a few accidents in Europe such as KPN today and Saipem last week, results have been relatively good here." According to Thomson Reuters data, of the 53 percent of S&P 500 companies that have reported earnings so far, 69 percent have beaten profit expectations.
Among the 19 percent of STOXX 600 Europe companies that have reported results so far in the earnings season, only 35 percent have missed analyst forecasts. Shares in Munich Re gained 3.9 percent after the world's biggest reinsurer raised its dividend more than expected, posting below-average damage claims and surging investment income. British oil company BP rose 1.4 percent after posting fourth quarter results that beat expectations.
"All in all stocks are still undervalued, and the asset class as a whole doesn't have much competition from the very low returns you get from government bonds," said Eric Galiegue, head of Valquant, a Paris-based financial research firm.
"The economic recovery in Europe is still at risk, but it's priced in already. The real point of concern now is the currency war and the strength in the euro. A further 10 percent rise in the currency would trigger a 4 percent drop in earnings per share." The euro has gained 3 percent against the dollar since the start of this year on improving economic data and the view that the worst may be over in the euro zone debt crisis.
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