U.S. bank stocks rose as a broker upgrade and a successful bond sale by debt-ridden Portugal added to a mood of optimism.
Separately, J.P. Morgan Securities said it prefers European investment banks to their U.S. peers, as it sees them benefiting from a new rule banning proprietary trading by banks.
Both the S&P Financial <.GSPF> and the KBW Bank index <.BKX> gained more than 1.5 percent, while, in Europe, the FTSE350 Banks Financial index <.FTUB8300> jumped more than 3 percent to a 2-month high.
JP Morgan Chase & Co
Wells Fargo analyst Matthew Burnell said lower credit costs should boost U.S. bank earnings, despite sluggish revenue.
He named Bank of America, PNC Financial
The brokerage -- which raised its sector rating to overweight from market weight -- expects banks to report 59 percent earnings growth in 2011 versus an expected 12 percent growth for the S&P 500 <.SPX>.
Earlier, JP Morgan downgraded Goldman to neutral on valuation, and said it prefers Morgan Stanley
Analysts at JP Morgan, who previously rated Goldman overweight, said shares of the company have outperformed peers by about 17 percent since an upgrade last July, and the stock starts to be less attractive against global investment banking peers.
Goldman is the best-in-class liquidity provider today, but potentially has the most to lose from the new regulation, the analysts said, referring to the proposed Volcker rule on proprietary trading.
BofA Merrill Lynch analysts also said Volcker compliance would be painful for Goldman, though the new mix will likely be less capital intensive and less volatile.
On Tuesday, Goldman revealed for the first time how much it made from trading and investing on its own behalf, and pledged to be more open about how it makes money.
Though the eventual earnings impact of the Volcker rule depends on the final rule making, it will have a negative impact on liquidity and volumes, with end-users of all products ultimately bearing the increased cost, JP Morgan said.
European investment banks are clear winners as Volcker rule provisions are unlikely to be implemented by the European Union or Swiss authorities, the JP Morgan analysts said.
JP Morgan now ranks UBS AG
(Reporting by Sweta Singh in Bangalore; Editing by Unnikrishnan Nair)