European stocks on Monday had their best day since June, leading a global equity market rally driven by investors scooping up shares in beaten-down sectors as a choppy month draws to a close.

The region-wide Euro Stoxx 600 index was 2.2 per cent higher, its best showing in three months, with German’s Dax 30 posting a 3.2 per cent gain and the FTSE 100 rising 1.5 per cent.

Financials led the way, reversing a sell-off last week that pushed the Stoxx banking index to its lowest level since at least the late 1990s. Lenders including Deutsche Bank, Commerzbank and BNP Paribas were up more than 5 per cent on Monday. Other sectors that had been under pressure such as travel and leisure companies also perked up in Monday’s broad rally.

US equities joined in the rebound. The S&P 500 was up 1.5 per cent by lunchtime in New York, led by financials. Bank of America shares were up 3 per cent and Citigroup’s almost 4 per cent.

“It’s a risk-on trade that benefits value stocks, financials, cyclicals — the ‘back to work’ stocks compared to the ‘work from home’ stocks,” said Michael Mullaney, global head of research for Boston Partners, a fund manager.

The action reflected an easing of concern over recent coronavirus cases and emerging signs of inflation, he said. “Anything that is somewhat indicative of more inflation on the horizon benefits financials.”

Line chart of European indices since January (rebased)

Market sentiment was bolstered by data that showed profits among China’s industrial companies leapt 19.1 per cent in August from the same month in 2019, the latest sign that the vast economy was rebounding from the effects of coronavirus.

Meanwhile, Diageo, the world’s biggest spirits maker, struck a confident tone on the US economy. It said its business there had been performing above its expectations, reflecting “resilient consumer demand” and more confidence among some retailers.

Monday’s rise comes at the end of a bumpy month for global markets. The S&P 500 has declined almost 6 per cent since the end of August, while the Stoxx 600 has fallen about 1 per cent.

Sebastien Galy, macro strategist at Nordea, said investors were in “buy on dip mode” and that markets had not “yet reached the bottom”. He said the gains on Monday may have been flattered by fund managers purchasing equities to rebalance their portfolios at the end of the month.

Fears that markets might take a turn for the worse in the fourth quarter — with potential coronavirus surges and a tumultuous US election — could “become a self-fulfilling prophecy”, said Armin Peter, head of debt capital markets at UBS.

Still, other investors took a more optimistic view. Shamik Dhar, chief economist at BNY Mellon Investment Management, said he expected a return to pre-pandemic levels of economic activity by about the middle of next year. That should be possible if governments avoided a return to full lockdowns and kept the bulk of their economies going, he said.

US politics is likely to take the spotlight this week, with President Donald Trump’s first election debate with Joe Biden, his Democratic rival for president, scheduled for Tuesday.

In currencies, the pound jumped almost 1 per cent against the dollar and the euro to $1.28 and €1.103 respectively. Analysts said they were paying close attention to developments on Brexit talks and any potential new coronavirus restrictions to subdue a surge in the virus.

Stocks in the Asia-Pacific region had an upbeat start to the week, with Hong Kong’s Hang Seng up 1 per cent, Japan’s Topix 1.7 per cent higher and China’s CSI 300 up 0.3 per cent, in an extension of the tech rally that bolstered Wall Street on Friday.


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