Europe close: Banks lead gains

European stocks moved higher despite heightened speculation that the Federal Reserve will hike rates possibly as early as next month.

Banks traded higher on both sides of the Pond, with the DJ Stoxx 600 sector index for bank shares gaining 1.82% to 145.03 and the US KBW Bank index up by 3.0%.

On the flip side, strength in the greenback contributed to weakness in commodity prices, dragging the sector gauge for Basic Resources lower by 0.61% to 272.14.

A stronger greenback makes dollar-denominated commodities more expensive for holders of other currencies.

By the closing bell, the benchmark DJ Stoxx Europe 600 index was up by 0.85% to 337.58, while Germany’s DAX gained 0.54% or 53.04 points to 9,943.23 and France’s CAC 40 tacked on 0.51% or 21.73 points to finish at 4,319.30.

At the same time, oil prices were choppy, with West Texas Intermediate up 0.94% at $48.77 a barrel and Brent crude up 0.545% to $49.55 on the ICE.

“Global stock markets have been rife with indecision today as traders wake up to the idea that the notion of a June rate hike from the Fed may not be such a crazy idea,” said Joshua Mahony, senior market analyst at IG.

Atlanta Fed President Dennis Lockhart and San Francisco Fed President John William said on Tuesday that there could be two or three rate hikes on the cards this year.

Meanwhile, investors were also digesting a downgrade of global equities to ‘neutral’ by Goldman Sachs over a 12-month period on growth and valuation concerns.

“Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis. We expect particularly poor returns in dollar terms, with our forecast of a stronger dollar and the prospect of less negative equity/FX correlations,” the bank said.

In corporate news, luxury retailer Burberry was under the cosh after it said full-year profits fell 10%, at the bottom of analysts’ range of estimates.

The company's latest numbers prompted analysts at SocGen to warn clients not to expect any recovery in earnings per share before 2019.

Shares in Swiss hearing aid maker Sonova tumbled after its full-year results missed analysts’ sales and profit targets.

AstraZeneca was little weaker after announcing that its trial of ovarian cancer drug Lynparza in combination with chemotherapy, compared with paclitaxel chemotherapy alone, did not meet the primary endpoint of overall survival in advanced gastric cancer patients.

Brewer SABMiller nudged higher after reporting a 10% drop in revenue for the year in its preliminary results to $19.8bn, though the company did claim 7% organic revenue growth at constant currencies.

Novartis was in the black after announcing the departure of its head of pharmaceuticals, David Epstein.

On the macroeconomic calendar, data from Eurostat confirmed the Eurozone fell back into deflation in April.

Consumer prices fell 0.2% compared to a year ago, in line with the preliminary estimate and consensus, and down from 0.0% in March.

The main drag was from a drop in the rate of services inflation, with prices up 0.9% compared to 1.4% in March.

“Today’s results show that inflation in the eurozone is holding steady, but a contracting rather than expanding economy is surely not what Mario Draghi had in mind at this stage of his ECB presidency,” said Dennis de Jong, managing director at UFX.com.

“Draghi is running out of options to turn around a flagging EU, and he will know that in just five weeks’ time he could have to deal with the uncertainty that a British vote to leave the European Union would bring. Waiting until the result is known on 24 June seems to be the order of the day for investors and policymakers alike.”

The Federal Open Market Committee minutes are due at 1900 BST.