The pan-European STOXX 600 jumped 2% higher, its biggest one-day percentage gain in nearly a year.
The benchmark index fell 0.3% on Monday as military clashes between Israel and the Palestinian Islamist group Hamas sent oil prices surging and investors seeking the safety of bonds and gold.
Longer-dated euro zone bonds and U.S. Treasuries rallied on dovish messages from Fed and ECB officials.
Inflation should still land at the ECB’s target of around 2% by the end of 2025 despite the Middle East conflict, ECB policymaker Francois Villeroy de Galhau said.
Top ranking Fed officials indicated on Monday that rising yields on long-term U.S. Treasury bonds, which directly influence financing costs for households and businesses, could steer the Fed from further increases in its short-term policy rate.
“Reality is people are trying to get more positive because there have been some dovish tones coming out of various Fed officials,” said Tom Lemaigre, Portfolio Manager for European equities at Janus Henderson. “Geopolitical tectonic plates are shifting whereby there’s going to be more protectionist measures in terms of trade.”
Data on Thursday is expected to show U.S. consumer prices cooled in September, potentially taking the pressure off the Fed to raise rates again next month.
European stocks touched six-month lows earlier this month as European and U.S. bond yields hit multi-year highs on bets that major central banks will keep interest rates higher for longer.
While stocks have bounced off the lows, the upcoming earnings season, economic data and the moves in oil prices will be key in determining the trajectory for markets into year-end.
Strategists at Deutsche Bank have recommended an overweight in equities into 2024, as risks are now well reflected in the market and those are about to turn into opportunities, they said in a note.
The International Monetary Fund cut its growth forecasts for China and the euro zone and said overall global growth remained low and uneven despite what it called the “remarkable strength” of the U.S. economy.
All the sub indexes were in the green, with travel and leisure, miners and technology indexes leading gains.
AAK shares rose 7.7%, among top gainers on the benchmark index after the Swedish food processing company reported a rise in preliminary third-quarter profit.
Euroapi slumped 59% after the French pharmaceutical company cut its 2023 guidance and suspended its mid-term targets.
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