European shares closed at their highest level in more than four months on Monday, with cyclical shares driving gains on the back of recent US economic data and hopes for fresh policy actions to help debt-market strugglers Spain and Italy. Sectors linked to growth such as autos and construction rose after strong US jobs data on Friday and growing expectations of fresh action from the European Central Bank to ease funding pressures in the peripheral euro zone buoyed risk appetite.
---- Cyclicals among top gainers, autos up 2.2pc
"It's not the time to be underweight equities," said Didier Duret, chief investment officer at ABN-Amro Private Banking, which manages more than $200 billion. "The markets are embarking on hopes to see some progress on the European situation and that the ECB has stated a ... road map to support Spain and Italy. We are in an environment where it seems the US economy is bottoming out. If confirmed, it will be matched by an outperformance of cyclical shares."
Spanish shares, which were halted for several hours due to a technical glitch, rose 4.4 percent, while Italy's FTSE MIB gained 1.5 percent on expectations that any support from the ECB to lower borrowing costs will help the economy. The prospects of a policy move prompted investment bank Jefferies to advise investors to bet on the outperformance of IBEX by going 'long' on the index.
The FTSEurofirst 300 index ended 0.4 percent firmer at 1,085.79 points, the highest close since late March. Trading remained thin in the summer holiday season, at 82 percent of its 90-day daily average. Stocks traditionally seen as cylcicals were in demand, with the STOXX Europe 600 auto index up 2.2 percent, euro zone banks up 2.8 percent, construction shares rising 1.7 percent and miners advancing 1.3 percent.
"If you get some decent news from China, mining stocks will get another push," said Daniel Harris, head of dealing at H2O Markets, adding equities had already gained on hopes the ECB would do whatever needed to avoid any collapse of the euro zone. A Reuters poll showed Chinese factory output and fixed-asset investment should show a modest recovery taking hold in July, with easier inflation likely to give the government more room to tweak policy settings to underpin growth. Industrial production, alongside retail sales and inflation data, is due on Thursday.
Harris said the market might struggle to make further strong advances in the near term in the absence of more catalysts, while technical analysts said a major stock index faced a stiff resistance level. The euro zone bluechip Euro STOXX 50 index rose 1.1 percent to 2,399.32 to close just below a key level of 2,400 points, which proved to be a strong resistance, as was seen in December 2011 and January 2012.
"Given the slow stochastic momentum oscillator entering the overbought region, the test of the 2,400 seems to see a pull back to the 2,335 and 2,300 support region, where the next big move would likely to be determined," Dmytro Bondar, technical analyst at RBS, said. "Alternatively, a sustained break above 2,400 would be a signal for further price advance."
Investors kept a close eye on the second quarter earnings season for near-term direction. Thomson Reuters StarMine data showed that about 65 percent of Europe's STOXX 600 firms had reported results so far, of which 50 percent companies had met or beat forecasts, while the rest missed the estimates. Companies that make money outside Europe outperformed, with Richemont rising 5.2 percent after the Swiss-listed luxury goods maker said its first half net profit could rise by as much as 40 percent, helped by demand from emerging markets and sales to Asian shoppers visiting Europe.