European shares advanced in thin Tuesday trade after a jump in US housing starts, a sharp rise in a key German business sentiment survey and a solid Spanish debt auction brightened investors' outlook on global economic prospects. Movements were exaggerated by low volume, and long-term fund managers said they would not buy riskier assets until further signs the eurozone debt crisis was easing and until company outlooks improved.
Stocks extended gains in afternoon trade after a 9.3 percent increase in US housing starts suggested the market was entering a tentative recovery. Strong German Ifo data boosted hopes Europe's biggest economy was growing and supported early market gains.
The cyclical carmaking sector, where performance is tied to strong economic growth, was the top performer, with the STOXX Europe 600 Automobiles & Parts index surging 5.1 percent on the improved growth outlook. "Markets are taking a favourable view of the economic data as this could mean the company earnings outlook is not so bad," Mike Lenhoff, chief strategist at Brewin Dolphin, said.
Also boosting sentiment was a halving in Spanish borrowing costs following a debt auction, with analysts saying much of the purchasing power came from cut-rate money to be lent by the European Central Bank (ECB). Italy's UniCredit, whose performance is highly correlated to bond yields, gained 6.3 percent, to be one of the top movers. The pan-European FTSEurofirst 300 index of top shares closed up 2 percent at 976.27 points, but volume was only 72.2 percent of its 90-day daily average.
The index pushed through its 38.2 percent Fibonacci Retracement at 959.5 points from its most recent November to December rally, with this level seen now acting as a support. The next resistance level was seen at 975.82 points, a 23.6 percent Fibonacci Retracement from its recent rally.