European shares were at their highest levels in nearly four months by midday on Tuesday with financials the top gainers on hopes that U.S. government stress tests on banks would reveal only modest capital shortfalls.
At 1037 GMT the pan-European FTSEurofirst 300 index was up 1.1 percent at 852.09 points. The index is up 32 percent from its March 9 lifetime low.
"People have been wanting to price in the turning point for quite a while," said Georgina Taylor, equity strategist, Legal & General Investment Management.
"We've had valuation support for some time. Now you're getting the data to back it up, a combination of top-down macro data and some better than expected earnings. The market is starting to price in a recovery."
"With the stress tests it may be a case of 'better the devil you know' – get them out of the way and then move on."
Banks were among the biggest movers. Swiss bank UBS was up 4.5 percent after its finance head said that its capital position was strong compared with rivals. The group confirmed it had posted a net loss of 2 billion Swiss francs ($1.76 billion) and said it remained cautious. HSBC, Standard Chartered and Societe Generale gained between 7 and 10.5 percent.
U.S. regulators have been poring over the books of the 19 largest U.S. banks to determine if they have enough capital to withstand further shocks.
Banks are expected to be briefed on Tuesday on the final results, which will be published on Thursday.
A source familiar with official talks told Reuters about 10 would be told they need to increase the size of their capital cushions. "A lot of the stress test is designed for public consumption to try and give people confidence that the banks are going to be viable. The question is which of them is going to need capital to be able to survive," said Justin Urquhart Stewart, director at Seven Investment Management.
"The stress test looks like it will be a lot more benign than it did (earlier) and the U.S. banks index was up sharply so we're playing a bit of catch-up," said a trader.
Britain's FTSE 100 was up 2.8 percent after a UK market holiday on Monday. Germany's DAX and France's CAC 40 were up 0.1 and 0.3 percent respectively.
VEDANTA SOARS AHEAD OF RESULTS
The UK's outperformance was also powered by its heavyweight mining sector. Vedanta was up 15 percent ahead of results on Thursday. Xstrata was up 8.6 percent after it posted a 7.7 percent rise in first-quarter production of coal, its most profitable commodity. Rio Tinto was 6.9 percent higher. The Financial Times reported on Monday that a senior executive of Chinese metals firm Chinalco stood by a planned $19.5 billion tie-up with the global miner. Irish drugmaker Elan rose 15 percent as traders cited renewed talk Denmark's Lundbeck was planning to bid for it. Lundbeck declined to comment.
On the downside, Adidas slumped 9.1 percent after the group said its first-quarter operating profit fell nearly 80 percent to 58 million euros, worse than the average analyst forecast of 179 million in a Reuters poll.
French telecoms equipment maker Alcatel-Lucent fell 3.3 percent after it swung to a bigger-than-expected first-quarter adjusted operating loss but stuck to its target for around breakeven this year. Metro, the world's fourth largest retailer, lost 3.3 percent, after it reported a worse than expected 49.3 percent slump in first-quarter underlying operating profit as currency devaluations in Eastern Europe weighed. Wall Street may edge up in early trade, having closed at its highest in four months on Monday.
Futures for the Dow Jones, S&P 500 and Nasdaq were up between 0.05 and 0.3 percent.
Investors will focus on the Institute for Supply Management's April non-manufacturing index with economists in a Reuters survey forecast a reading of 42.0 versus 40.8 in March.
