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[LONDON] A broad-based rally pushed European stocks to the biggest advance in almost a month on optimism monetary policy will remain supportive of growth.
Miners traded near a 14-month high as commodities climbed, with the US dollar extending a drop on speculation the Federal Reserve will raise rates gradually even amid a pick-up in the global inflation outlook.
Italian and Spanish firms led an advance in lenders, pushing a gauge tracking them to its biggest jump in almost two months. Earnings are also in focus, with Remy Cointreau SA up 1.5 per cent and Domino's Pizza Group Plc jumping 6.5 per cent on better-than-estimated sales.
The Stoxx Europe 600 Index added 1.5 per cent at the close, climbing for the second time in three days. Speculation about central-bank policies have hindered equity gains after the Stoxx 600 reached a four-month high in September.
The European Central Bank will give an update on Thursday. Most economists in a Bloomberg survey predict it will prolong the bond-buying programme at its December meeting.
"The strongest argument to buy into European equities is not the earnings story, but that the ECB may extend its quantitative easing programme and support risky assets," said Jasper Lawler, an analyst at CMC Markets in London.
"Valuations are relatively lower than the US."
Regardless of whether the Fed raises rates, European equities have scope to rally through the end of the year, and their valuations will help cushion the impact of potential risks, Barclays Plc says.
After a slump of 6.4 per cent this year, members of the Stoxx 600 trade at an average 14.8 times estimated earnings, or about 11 per cent cheaper than those on the S&P 500 Index.
While a report showing a pick-up in US inflation in September strengthened the case for higher borrowing costs, Fed Chair Janet Yellen said earlier this month there are "plausible ways" that running the economy hot could fix damage caused in the recession. Traders are pricing in a 64 per cent chance the central bank will raise rates in December.
Lenders, the biggest losers of 2016 amid concerns over profitability, posted some of the best gains in the Stoxx 600 on Tuesday after Bank of America Merrill Lynch raised its rating on the industry to overweight.
Banks remain "heavily underowned" and the earnings momentum is turning "less bad", strategists including Ronan Carr wrote in a note. Banca Popolare dell'Emilia Romagna SC and UniCredit SpA rose at least 2.6 per cent, sending Italy's FTSE MIB Index to the biggest advance among western-European markets.
Among stocks active on earnings reports: Bellway Plc led UK homebuilders higher, up 6 per cent after posting annual profit that topped projections and raising its dividend.
Ryanair Holdings Plc rose 4.9 per cent, reversing an early drop. While the airline lowered its profit guidance amid Brexit-induced losses in sterling, analysts said the effect is already reflected in its valuation and the company stands out as a winner. Peer EasyJet Plc added 5.1 per cent.
Burberry Group Plc tumbled 7.2 per cent after its wholesale revenue declined more than expected in the first half of the year. Bureau Veritas SA slipped 2.7 per cent after lowering its annual outlook.
Kuehne & Nagel International AG dropped 2.6 per cent after its profit missed estimates.