Euro zone banking stocks featured among the top gainers, with Bankia up 4.6%, Banco Popolare up 3.4% and Credit Agricole up 3.6%.
Recent comments by European officials including ECB chief Mario Draghi have sparked expectation that the bank would take steps to lower the cost of borrowing of Spain and Italy when it meets on Thursday, triggering a sharp recovery rally in equities over the past few sessions.
However, other investors doubted that ECB policymakers would deliver in line with market expectations this week, given Germany’s Bundesbank still opposes a resumption of the bond-buying programme, seen as crucial to capping Spanish and Italian borrowing costs.
“Markets have reached a point that has priced in action by the ECB. This sets up a situation where Draghi will now have to back his words with action or we could see markets tumble quicker than they rallied,” GFT market strategist Andrew Taylor said.
At 2:23pm, the FTSEurofirst 300 index of top European shares was up 0.6% at 1,062.62 points, after rising to as high as 1,066.59 points, a level last seen in early April. The index has surged 4.4% in three sessions.
The euro zone’s Euro STOXX 50 index was up 0.4% at 2,311.07 points. The blue chip index gained as much as 1.2% in early trade and tested a key resistance level, its 200-day moving average, at 2,323.
But the index was capped by another major resistance level at 2,331, representing the 50% retracement of the March-to-June slide.
The recovery in investors’ appetite for risky assets such as equities was also reflected in the put/call ratio on the Euro STOXX 50 which fell to a one-month low of 0.57, according to data from the Eurex exchange.
Signs of a shift in investors’ mood was also emerging from last week’s fund flow data from EPFR Global.
The data showed Europe equity funds recorded overall outflows for the third straight week, with retail redemptions on the rise, but institutional investors committed money to these funds for the fifth time in the past six weeks, data showed.
Around Europe, UK’s FTSE 100 index was up 0.3%, Germany’s DAX index up 0.3%, and France’s CAC 40 up 0.4%.
But despite the sharp three-day rally in stocks, the macro backdrop remains grim, with data showing on Monday Spain sinking deeper into recession in the second quarter.
On the earnings front, Air France-KLM surged 12% after saying it has halved its operating loss on improved passenger activity.
