European shares hit a nine-week closing high on Wednesday after stronger euro zone economic data and news that Slovakia is set to sign off on a plan to expand the region's sovereign bailout fund helped spur demand for cyclical stocks.
Better-than-expected August industrial output data helped drive early gains, while the Slovakia news -- though expected by many, even after it initially rejected the plan on Tuesday -- buoyed markets into the close, particularly banks .
The under-positioning in financials plus continued rhetoric about a unified European solution (to the debt crisis) makes people less happy to be short, a trader at a U.S. investment bank said.
Hopes of further action to stem the region's debt crisis have grown since German and French leaders pledged to unveil a package to solve the problem this month.
While a rescheduled Oct. 23 meeting of the European Council will be the main focal point for investors, G20 finance ministers are set for a two-day meeting starting Friday, at which the euro zone crisis will also be discussed.
Nomura strategist Alastair Newton said in a note markets were looking for the issue of bank recapitalisations, a further writedown of Greek debt and an even bigger boost to the region's bailout fund, to be dealt with in a fresh package.
We believe the first step in reaching such an agreement involves bridging what we see as significant gaps between Berlin and Paris over the means by which Europe's ailing banks should be recapitalised, he said.
Progress with this and the other two issues is likely to remain hampered by domestic political considerations, not only in France and Germany but across the eurozone as a whole.
Sources said on Wednesday euro zone countries will ask banks to book losses of up to 50 percent on their Greek debt holdings as part of a plan to avoid a disorderly default.
By the close, the broader FTSEurofirst 300 index of leading European shares was up 1.6 percent at 977.02 points, its highest close since Aug. 4.
While the index fell 0.3 percent on Tuesday, it is up nearly 6 percent in October after losing 16.9 percent in the third quarter.
Lending weight to the bank gains was a bullish sector note from Societe Generale, in which it said the recent sell-off -- the STOXX Europe 600 fell 28 percent in the third quarter -- had been overdone.
Our calculations suggest current valuations discount sizeable sovereign debt haircuts, a severe double-dip recession, and across-the-board bank recapitalisations. If all happen, then the sector appears fairly valued, it said.
However, we believe that politicians will eventually put in place the necessary reforms required to unlock the valuation potential available. Existing valuations leave significant upside potential if current fears prove overdone.
Autos posted the biggest sectoral gain, with Fiat up 7.8 percent in volume nearly double its 90-day daily average after majority-owned U.S. unit Chrysler reached a tentative pay deal with a leading union.
The surge in Fiat shares came amid strong gains for a host of Italian blue-chips as the FTSE MIB index ended up nearly 3 percent.
Italy's been an underperformer for obvious reasons, but there are good global companies such as Fiat, Fiat Industrial and Pirelli, that are so cheap versus their peers that people are finally taking the plunge, a trader at a European investment bank said.
The market's structural short position, as a result of the third-quarter sell-off and underweight stance of many fund managers to European equities, meant it doesn't take a lot of inflow to get that moving in the other direction, the trader at a U.S. investment bank said.
Historically, the last quarter is one of the best, particularly after a poor third quarter. With hedge fund performance also being so poor, there could be a little bit of an environment where they're forced to chase the market.