European shares rallied on Tuesday, with banks leading gains, after a well-received Spanish debt auction, an upbeat German economic sentiment reading and positive US corporate earnings releases boosted investor sentiment. The FTSEurofirst 300 index closed up 2.0 percent at 1,053.12 points, near the session peak and back at levels seen before the Easter break.
Charts showed the index, in an encouraging sign, was finding support above the 38.2 percent Fibonacci retracement level of the rally from the low in November to the high in March, though analysts said the market was still looking vulnerable. "If you put a gun to my head I would be a seller at the 1,050 area (the low on March 7) and then I would be long above 1,056 (the low on March 29)," Phil Roberts, chief European technical strategist at Barclays Capital, said.
Spanish bond yields, which have surged in recent days on concerns about the country's economy, eased back as Tuesday's better-than-expected bill sale brightened the mood. However, a number of strategists reckoned the equity market gains might prove short-lived, with Spain's more challenging longer-term debt auction later in the week seen as a bigger indicator of investor sentiment.
"Certainly a majority of European equity markets are going to struggle to make headway until the situation with regard to the European debt crisis calms down and the growth outlook becomes clearer," Richard Jeffrey, chief investment officer at Cazenove Capital Management, said. "I think if required the ECB will intervene further ... but I think this will be a risk-off quarter whereas the first quarter - the majority of it was risk-on."
Nomura said that maintaining a bullish outlook for European companies has been a tough challenge in the past few weeks, but the gap between the risk premium and the level of volatility is wide and could support a rally in equities. It is "overweight" cyclicals and "underweight" defensive sectors. Within cyclicals, it is adjusting its allocation more in favour of resources at the expense of industrials. It is also trimming its weighting in tech companies and adding to banks.
European banking stocks, pressured in the previous two sessions, jumped 4.1 percent as US peer Goldman Sachs unveiled first-quarter profits which beat analyst forecasts. That was the biggest one-day percentage gain for European banking stocks since January 19, the last time big US banks reported earnings.
Barclays, rising 4.6 percent, spearheaded the London-listed banks' advance after BofA Merrill Lynch said earnings upgrades could be on the horizon for the lender. "With euro zone fears hitting the shares recently, we think the Q1 results could re-focus investors to the fundamental attractions," BofA Merrill Lynch said. Reasonably positive comment from the International Monetary Fund (IMF) in its latest World Economic Outlook, also proved supportive for equities. Global growth is slowly improving as the US recovery gains traction and dangers from Europe recede, but risks remain elevated, the IMF said.