Europe close: Banks gain as analysts eye potential for a bounce

Banks paced gains on the Continent's main bourses at the start of the week as European Central Bank chief Mario Draghi left open the possibility of further monetary stimulus when the governing council next met, in March.

The benchmark DJ Stoxx Europe 600 index was up 2.99%, Germany’s DAX by another 2.67% and France’s CAC 40 was 3.01% firmer.

In testimony to the European parliament on Monday afternoon, Draghi said the ECB stood ready to do more if either the declines in the price of commodities or damage to the transmission mechanism for its monetary policy, through banks, pointed to downside risks for price stability, Mario Draghi said on Monday.

Possibly adding to the pressure for the ECB to act, earlier in the day Germany's own central bank, the Bundesbank, slashed its forecast for consumer price inflation in the euro area's largest economy for 2016 from 1.1% to just 0.25%.

Over the course of 2017 the country's CPI was now seen rising by 1.75%, instead of 2.0% before the latest revisions.

"The German economy might expand at a somewhat faster pace in the first quarter of 2016 compared with the end of 2015 thanks chiefly to strengthening domestic dynamics," the Bundesbank said.

"Greater momentum is likely to be provided by consumption, which is continuing to benefit from the buoyant labor market situation."

Remarks from the boss of China's central bank on Saturday about the need for patience in balancing reform, growth and stability, as well as China's need to remain a responsible economic power were also seen as boosting risk-apettite in the oil and wider commodities space.

Sentiment was also supported by a rise in China’s yuan to its strongest level this year against the dollar, after the People’s Bank of China guided the currency sharply higher.

A jump in Japan’s Nikkei-225 overnight, which rocketed 7.2%, while the Hang Seng gained 3.3%, despite a weaker than expected Japanese fourth quarter GDP print, also helped to prop up investor spirits.

As markets gained, JP Morgan strategist Mislav Matejka waded in telling clients that: "some tactical indicators are again signaling that equities are becoming oversold in the short-term, which could argue for a near-term bounce, potentially a bigger durable one than the 6-8% up move we saw toward the end of January."

However, "we are cautious on equities for 2016 and look for further weakness in 2H. The crucial concern is that profits are rolling over," he added.

Banks were the standout gainers following sharp declines the previous week, with the Stoxx 600 index for the sector up 3.48% to 142.59 points.

Banks in Italy fared particularly well, following a report the Italian Treasury said the European Central Bank was in talks with the Italian government about buying bad loans from the nation’s banks as part of its asset-purchase scheme.

Banco Popolare di Milano rose nearly 6% while Banco Monte dei Paschi di Siena surged 9% despite Draghi having later expressly dismissed that report.

On the corporate front, HSBC was higher after the bank said it would keep its London headquarters rather than move to Hong Kong.

London-listed consumer goods company Reckitt Benckiser rallied after its fourth quarter sales beat analysts’ expectations.

Hennes & Mauritz shares were higher after the Swedish retailer said sales in January rose 7% from the same month last year.

International Consolidated Airlines flew higher after Bank of America-Merrill Lynch double upgraded the stock to ‘buy’.

On the data front, the Eurozone trade surplus fell to €21bn in December from a downwardly-revised €22.6bn in November, according to data released by Eurostat. This was below consensus expectations for €22.4bn.

On an adjusted basis, the trade surplus came in at €24.3bn compared with €23.6bn the previous month.

US markets were closed for Presidents’ Day, so volumes were lighter than usual.