Europe shares rise, euro falls briefly as sources say Merkel to give up as party chief

LONDON: European shares climbed and U.S. stock futures erased losses on Monday thanks to encouraging earnings reports, while the euro fell briefly after sources said German Chancellor Angela Merkel would not seek re-election as head of her CDU party.

Her decision, which followed bruising losses for her Christian Democrats in a regional election in Hesse, heralded the eventual end of an era in which she has dominated European politics.

Senior party sources said Merkel wants to serve her full term as chancellor until 2021, comment which eased investors' nerves and subsequently drove the euro back into positive territory.

Europe's autos sector surged 4.7 percent, set for its strongest day since August 2015, after a report that China was considering halving the tax on car purchases in an attempt to boost demand for autos which has been hurt by a trade war and slowing economic growth.

Germany's DAX jumped 2.1 percent by 1128 GMT, boosted by BMW, Daimler and Volkswagen, while the leading index of euro zone stocks rose 1.5 percent.

Italy's FTSE MIB led the market with a 2.8 percent gain after Italian bond yields fell sharply to a one-week low following Standard & Poor's decision to leave Italy's sovereign rating unchanged, prompting relief there was no ratings downgrade.

This also pushed Italian bank stocks up 4.5 percent, set for their strongest day since Sept. 10.

Strong gains across Europe helped boost U.S. stock futures back into the positive, with the Nasdaq futures up 1.4 percent, S&P 500 futures up 1.1 percent and Dow Jones futures up 0.7 percent.

The MSCI world equity index, tracking shares in 47 countries, extended early gains to rise 0.4 percent. The index is down 9.3 percent so far this month and has shed $6.7 trillion in market capitalisation since its January peak.

Despite gains on Monday, investors remained wary of betting on a turnaround in risk. "The only way I can summarize the core sentiment among the European investors I met is something like 'pretty grim'," wrote Erik Nielsen, group chief economist at UniCredit, in a note to clients.

Overnight Asian stock trading was dampened by China's blue-chip index which tumbled more than 3.3 percent.

Chinese data underscored worries of a cooling economy as profit growth at its industrial firms slowed for the fifth consecutive month in September due to ebbing sales of raw materials and manufactured goods.

Global financial markets have been hit by a range of negative factors from an intensifying China-U.S. trade conflict to tensions in Europe over Italy's budget and tightening monetary policy.

Many indices are already in official correction territory amid heightened worries over corporate earnings and global growth.

"With the volatility of the last week or so, today's stronger open to markets should not be seen as a sea change but more a pause for breath," said Edward Park, investment director at Brooks Macdonald.

Analysts have been downgrading their estimates for European earnings at the fastest pace since February 2016, and weak results from internet giants Amazon and Alphabet hurt U.S. stocks at the end of last week.

BOLSONARO WIN BOOSTS EMERGING STOCKS

Emerging markets stocks climbed 0.4 percent in their first rise in five sessions after far-right candidate Jair Bolsonaro won the runoff in Brazil's presidential election.

Brazil-exposed stocks in Europe climbed as investors cheered the win. Blackrock's Latin American Investment Trust London-listed shares gained 8.4 percent while a Germany-listed iShares MSCI Brazil ETF climbed 5.8 percent.

"Our initial assessment for the Bolsonaro administration is that it will have a pro-business stance, focused on enhancing the country's competitiveness," said UBS analysts.

Foreign exchange markets were relatively subdued with the dollar index holding flat.

The euro recovered after its fall on the Merkel news, and was last up 0.1 percent at $1.1407. Sterling held flat and near a two-month trough of $1.2775 before Britain's annual budget due later on Monday.

Finance minister Philip Hammond is likely to urge his divided Conservative Party to get behind the government's push for a Brexit deal, or put at risk a long-awaited easing of austerity.

In commodities, oil prices dipped as investors priced in growing worries about Chinese growth. U.S. crude pared early losses to fall 28 cents to $67.30 per barrel and Brent crude slid 29 cents to $77.33.