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Europe: Shares rise as Italy bank rally powers sector

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[MILAN] European shares rose on Tuesday for a second day with banking stocks surging to an 11-month high as investors dipped back into a beaten-down sector following Italy's constitutional referendum on the weekend.

The rally was led by Italian banks, which climbed 9 per cent, their biggest one-day since July, on short covering before a European Central Bank meeting this week and after Italian Prime Minister Matteo Renzi said he would step down following the referendum's defeat.

"No one held Italian banks before the referendum. It's a matter of positioning and investors are now covering short positions," said Anthilia Chief Investment Officer Andrea Cuturi. He said European banks were supported by a continued rotation into cyclical stocks.

Italy's banking index has lost half its value so far this year on worries over political instability and how to its handle bad debt.

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Monte dei Paschi rose 1.2 per cent on expectations of a state bailout of the troubled lender. "A clean and swift solution to Monte dei Paschi, even involving state aid, could help remove an impediment to Italian bank valuations, which have cheapened in anticipation of a 'No'outcome from the referendum," Barclays said in a note.

Two sources with knowledge of the matter said the Italian treasury was considering raising its stake in Monte Paschi to help it remain in business by buying out retail investors who own subordinated debt.

Europe's bank sector index rose 4.4 per cent to its highest level since Jan 14. Gains in banks helped the pan-European STOXX 600 index end up 1 per cent.

The utilities sector was also in demand after British power producer Drax Group Plc announced it plans to buy energy supplier Opus Energy and four gas power plant projects. Drax ended up 12 per cent.

Jefferies analyst Oliver Salvesen said Drax's plan would help it shift from its existing commodity-exposed business towards a more diversified model and expand its customer base .

The STOXX Europe 600 Utilities index climbed 2.7 per cent higher.

Among mid-caps, Britain's spreadbetting firms CMC Markets and IG both slumped over 37 per cent after Britain's financial watchdog proposed stricter rules for"contract for difference" products.

Gains in the broader European stock market were capped by a fall in commodities-related stocks.

The STOXX Europe 600 Basic Resources index dropped 1 per cent, the biggest decline by a sector, after prices of major industrial metals such as copper, aluminum and zinc fell. Energy shares also underperformed, with the regional oil and gas index ending flat after crude oil prices fell.