European shares touch 4-month highs, led by cyclicals

ECB President Mario Draghi last week laid out plans to buy bonds to lower borrowing costs for Spain and Italy. Although the plan was heavily conditional and markets were originally disappointed by the lack of immediate intervention, the prospect of eventual action has since helped drive down sovereign bond yields and boost risk appetite.

"He put enough in place to tide the market over for the next few months. He said he would be introducing more information over the next few weeks... so you can easily get caught offside by making the wrong decision," said Kevin Lilley, European equities fund manager at Old Mutual Asset Managers.

"My overweight position is in financials and the good thing is that financials are outperforming the cyclicals ... He is showing that he will take the necessary action, so I think people will become less risk averse as time progresses."

Euro zone banks added 0.8 percent, taking their rebound over the past two weeks from an all-time low to around 21 percent, while insurers gained 2.4 percent. Other cyclical sectors, such as autos also outperformed, while healthcare and food sold off as investors adopted a more pro-risk stance in their portfolios.

The improved sentiment helped the pan-European FTSEurofirst 300 was up 0.2 percent to 1,083.22 by 1016 GMT, hitting levels not seen since early April after rallying 2.5 percent on Friday and posting its ninth consecutive weekly gain.

The STOXX 50 index of euro zone bluechips rose 0.5 percent to 2,384.50, and technical strategist at SEB said more gains could follow.

"An alternated wave count points towards possible further gains up into the 2,422/2,499 Fibonacci projection area," they said in a note, highlighting resistance at 2,398 ahead of that.

Germany's DAX, up 0.6 percent at 6,906.50 points, made its way towards the psychologically key 7,000 mark, above which it has only traded in two months since last August.

Trading on the Spanish bourse was halted due to a technical glitch, but Italy - another possible beneficiary of ECB action - outperformed other major markets with a 0.8 percent rise.

Some sign of an easing of nerves in the crisis was industry numbers showing Spanish and Italian equity funds posted their biggest weekly inflows since the first quarter of 2011 last week, even as Europe as a whole saw outflows.

With policymakers signalling a willingness to backstop markets, strategists at Nomura suggested playing the market through the 'value' style.

"We still see room for inexpensive, under-owned risk assets to outperform in the second half ... Value in the global equity space is robust and capturable - leading us to continue emphasising a fairly cyclical- and higher-beta (1.2) global Focus List," its strategists said, highlighting stocks including car maker Daimler and miner Rio Tinto.

Euro zone woes, however, continued to resonate through the second quarter earnings season, with 50 percent of European companies missing expectations to-date against just 29 percent of U.S. ones, according to Thomson Reuters StarMine.

Companies that make money outside Europe outperformed, with Richemont topping the gainers board on Monday after the Swiss-listed luxury goods maker said its first half net profit could rise by as much as 40 percent thanks to strong demand from Asia and emerging markets.