European shares climb as banks, defence stocks lead broad-based rally

European equities surged more than 1 percent on Friday, with gains spreading across multiple sectors. Banks played a significant role in the broad-based rally, with Credit Agricole and Banco BPM leading the charge post-merger announcements. The Stoxx 600 index closed 1.26 percent higher at 656.52 points. The defence sector witnessed the strongest performance, climbing by 4.2 percent.

The Euro Stoxx banking index experienced a robust 3.1 percent increase. Banco BPM saw a staggering 10.7 percent jump following Credit Agricole's proposal to merge its Italian subsidiary with UniCredit, aiming to form a bank that would become Italy's third-largest. Banco BPM shares, however, dipped slightly following the news. UniCredit rose by 6.3 percent after reporting a stronger-than-expected 24 percent annual rise in third-quarter earnings and raising its full-year profit target.

The German lender Commerzbank, gearing up to adjust its strategy, was up 3.9 percent. Analyst Ipek Ozkardeskaya from Swissquote Bank highlighted the impact of AI productivity gains on European banks, noting that financing was also contributing to strong earnings. LSEG data indicated that European Central Bank is expected to raise interest rates by at least 25 basis points in January 2024.

Investors are also anticipating insights into potential successors to ECB President Christine Lagarde. Meanwhile, Brent crude oil prices fell 4.4 percent after US President Donald Trump indicated he would not support new strikes against Iran, provided ongoing talks for ending the conflict progressed. The technology sector gained 2 percent, showing resilience after recent declines due to concerns about the outlook for AI trade following Democrats' control of the US Congress.

Luxury stocks faced pressure, falling 0.7 percent, as China's consumer demand for European luxury goods was weaker in October, according to data.