European shares extended their advance on Wednesday as bargain hunters moved in after steep losses in the previous session, with Italian banks leading gainers across the region.
UniCredit and Intesa Sanpaolo rose to the top of the FTSEurofirst 300 leader board, both 5.3 percent higher, after falling 8.1 and 7.9 percent on Tuesday as fears of fresh debt crisis contagion rose.
The scale of Tuesday's slide brought in some short-term traders to buy the dips, with a pullback in 10-year Italian sovereign debt yields offering some reassurance. But a doubling in short-term debt costs at Italy's latest auction and a further widening in the cost of insuring its debt against default showed the broader picture remained weak.
Nomura, in a note, said it remains more constructive on Italian large cap banks, which have recently underperformed the sector, seeing them trading at more reasonable valuations.
Sentiment surrounding the sector overall was also helped by a note from HSBC, in which the broker moved to overweight on European banks for the first time in four years, again focusing on valuations.
HSBC said the sector is the most out-of-favour in Europe, citing negative ratings from sell-side analysts, underweighting by large international funds and prices below tangible book values, and that any sign earnings have bottomed could have a big positive impact on share prices.
We believe earnings could have bottomed so long as the euro zone economy does not contract by more than 2 percent in 2012, HSBC said.
Buyers also came in for miners, aided by better than expected first-quarter numbers overnight from Alcoa, which kicked off the Wall Street earnings season with a surprise first-quarter profit, following a loss in the fourth quarter of 2011.
The FTSEurofirst 300 index was up 7.96 points, or 0.8 percent, at 1,034.11 by 1204 GMT, having slid 2.5 percent on Tuesday to its lowest close since mid-January.
Market sentiment suffered a sharp blow on Tuesday when Spain's funding problems returned to the fore, adding to jitters about the global economy in the aftermath of Friday's disappointing U.S. employment report.
The mood was also darkened by fears that China's economy could be heading for a hard landing following robust inflation figures.
For equities unfortunately it's going to remain pretty volatile, said Richard Batty, strategist at Standard Life Investments, which has around $250 billion of assets under management.
The (big) issue is really the euro zone and are we going through another phase of essentially fiscal squeeze, impacting on growth, impacting on sentiment, and this sort of downward spiral... in the euro zone?, he said.
Standard Life Investments is underweight European equities.
Some strategists took the view that given recent weakness, with the FTSEurofirst 300 down nearly 7 percent since hitting an eight-month high in March, and up just 3.3 percent this year, investors might be lured back into the market.
We still believe there's an opportunity for investors to take advantage of any further weakness that we see to buy in at a cheaper level, to increase exposure, to harness the medium-to-long term outperformance that we expect from equities, said Henk Potts, equity strategist at Barclays Wealth.
The STOXX 50 advanced 26.49 points, or 1.1 percent, to 2,348.02, and according to its relative strength index, Europe's top blue-chip shares are trading near oversold territory, potentially providing short-term support.
Swedish medical technology firm Getinge was the sharpest faller across Europe after saying its first-quarter profit would be between 560-570 million Swedish crowns ($82-84 million), below analysts' expectations.
Its shares sank 5.7 percent, in heavy trading volumes, at two and a half times the 90-day daily average, making it the most heavily traded stock in the FTSEurofirst 300 index.
Britain's BT Group was the second-top faller, down 2.2 percent, pressured by a broker downgrade, with JPMorgan cutting its rating on the telecoms firm to neutral on valuation grounds, while also citing concerns over its revenue and dividend outlook.
In 2012, BT's shares have risen 14.5 percent, compared with a 5.2 percent fall for the European telecoms sector and 0.4 percent rise for the FTSE 100.
The stock has broken through its 20 and 50 day moving average support levels in the last two trading days.