European shares advanced in light mid-session trade on Monday, led by a sharp rebound in auto stocks, although sentiment remained subdued after negative Fitch comments on the euro zone crisis and the death of North Korean leader Kim Jong-il.
Automotive stocks <.SXAP>, which had fallen over 9 percent in the past two weeks, gained 2.2 percent, with food & beverage <.SX3P> and healthcare <.SXDP> shares also rebounding from Friday's sell-off.
We've had a short-squeeze-based rally because people were left net market neutral or net short on Friday, and that is spirited up by autos ... (which) is massively oversold, Justin Haque, pan-European equity trader at Hobart Capital, said.
People were rotating out of food and bev and now they're buying it back. It's cover short, un-cover short. No-one is holding big positions.
German car maker Volkswagen
The food & beverage and healthcare sectors, which were up between 1 and 1.6 percent by 1244 GMT, also benefited from investors seeking yield plays that guarantee safer returns in an uncertain economic environment.
We're not betting on a multiple expansion in a very low interest rate environment, so a way to generate return is the dividend, said Stefan Hofrichter, a member of Allianz Global Investors/RCM's asset allocation committee, said.
Hofrichter mentioned energy and food as two sectors where to play a dividend theme, while he was cautious on financials, warning their payout may prove unsustainable.
At 12:44 p.m., the FTSEurofirst 300 index of European shares was up 0.9 percent at 965.16, sending a bullish signal after rising back above the 50 percent retracement of the October-November move, although volume was low.
The index had opened lower, tracking negative trade in Asia as Kim Jong-il's death created uncertainty about the future of the reclusive Asian country and threatened to bring geo-political instability.
Also denting investor sentiment was Fitch's warning on Friday that a 'comprehensive solution' to the crisis was beyond reach, with the agency warning it might cut France and six other euro zone countries' credit rating.
Banking shares, up 1.5 percent, shrugged off the news, with some market observers arguing downgrades are now priced in.
We believe that the market has now already largely anticipated further downgrades of European countries from rating agencies. The question now is not if but rather when and by how many notches such action will materialise, Societe Generale said in a note.
Credit Suisse argued European leaders will ultimately manage to resolve the crisis, while quantitative easing would help head off a deflationary outcome and perceived tail risks receding.
We believe the political will, and a consciousness of the ultimate costs involved, will see the Euro area crisis ultimately resolved. That is not to say this is a world in which to base stock selection on strong macro views, the broker said in a note setting out its key themes for 2012.
The broker highlighted companies that can help themselves rather than rely on the cycle, with strong pricing power, structural growth and the ability to reward a shareholder with a growing dividend.
(Reporting By Francesco Canepa; Editing by Jon Loades-Carter)