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[LONDON] European equities rallied on Tuesday, helped by steadier oil prices and rising German investor sentiment, on the eve of a widely-expected interest rate hike from the US Federal Reserve.
The US central bank kicks off its two-day policy meeting with expectations that it will end on Wednesday with the first increase in borrowing costs since 2006.
"European markets are currently looking to break the eight-session losing streak that has been blighting the run up to the Fed rate decision," said analyst James Hughes at trading firm GKFX.
"Today's ... brief respite in the oil rout has given investors the chance to take European indices back to their true value levels ahead of tomorrow's announcement."
In the eurozone, the Frankfurt and Paris markets soared to close more than three per cent higher, while London stocks ended the day up 2.45 per cent.
Europe's main markets had fallen heavily on Monday, with London hitting a 2012 low on jitters over collapsing oil prices and a potential increase in rates for the world's biggest economy.
"The European indices are seeing an aggressive rebound Tuesday, aiming to recoup all of Monday's commodity-driven losses," said analyst Connor Campbell at trading firm Spreadex.
He added that Frankfurt equities had surged also due to "a better than expected German ZEW sentiment figure".
Investor sentiment in Germany rose for the second month in a row in December, amid confidence Europe's biggest economy is robust enough to withstand the refugee crisis and the economic slowdown in China, a leading survey showed.
The investor confidence index calculated by the ZEW economic institute rose to 16.1 points from just 10.4 points a month earlier.
In foreign exchange, the euro currency slipped to US$1.0925 from US$1.0992 late in New York on Monday.
Meanwhile, the Fed is set to finally push interest rates up for the first time in nine years, dealers say.
The bank's Federal Open Market Committee will assess whether the US economy is sufficiently strong to weather increasing the Fed funds rate from 0-0.25 per cent to an expected 0.25-0.50 per cent.
Ahead of the decision and following Europe's rally, US stocks rose one percent higher at the open Tuesday.
Near mid-day in New Yorki, the Dow Jones Industrial Average was still up 1.0 per cent at 17,542. The broad-based S&P 500 advanced 1.18 per cent while the tech-rich Nasdaq Composite added 0.80 per cent.
At the same time on Tuesday, world oil prices steadied after striking recent seven-year lows on abundant supplies and Opec's refusal to curb output.
That has helped to encourage investors back into equities, which are traditionally regarded as a riskier asset class.
"Risk appetite is showing tentative signs of improvement as oil prices are stabilising but sentiment remains fragile" ahead of the Fed meeting, said strategist Nick Stamenkovic at RIA Capital Markets.
"A 25bp (basis point) rate hike is pretty much seen as a 'done deal', so investors will be paying close attention to Fed Chair (Janet) Yellen's press conference for hints on the trajectory of interest rates over the medium-term," he told AFP.
Rebecca O'Keeffe, head of investment at online stockbroker Interactive Investor, said markets had priced in the rate hike.
"Having dropped by seven percent or more over the past two weeks, markets appear to have fully discounted the upcoming Fed rate hike," she said.
"Having fallen so far, so fast, we could see a reversal of sentiment as investors look beyond the immediate US rate rise, potentially offering a major buying opportunity."