Tuesday, 19 June 2018

Asia stocks skid to four-month low as Trump raises stakes in China trade war

TOKYO (Reuters) - Asian stocks sank on Tuesday and Shanghai shares plunged to near two-year lows as U.S. President Donald Trump threatened new tariffs on Chinese goods in an escalating tit-for-tat trade war between the world’s two biggest economies.

U.S. and European equity markets looked set to follow Asia into the red. S&P 500 futures were off 1 percent and Dow Jones futures were 1.1 percent lower.

Spreadbetters expected Britain's FTSE to open down 0.3 percent, with Germany's DAX  seen shedding 0.7 percent and France's CAC losing 0.8 percent.

Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, prompting a swift warning from Beijing of retaliation, as the trade conflict between the world’s two biggest economies quickly escalated.

It was retaliation, Trump said, for China’s decision to raise tariffs on $50 billion in U.S. goods, which came after Trump announced similar tariffs on Chinese goods on Friday.

China warned it will take “qualitative” and “quantitative” measures if the U.S. government publishes an additional list of tariffs on its products.

The trade frictions have unnerved financial markets, with investors and businesses increasingly worried that a full-blown trade battle could derail global growth.

“Trump appears to be employing a similar tactic he used with North Korea, by blustering first in order to gain an advantage in negotiations. The problem is, such a tactic is unlikely to work with China,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.

“A U.S.-China trade spat alone won’t hurt global growth. But there is always potential for Trump to keep increasing his threats which could have broader implications. Increasing trade has helped growth in emerging markets and this could be negatively affected.”

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.5 percent to its lowest since early February, with losses intensifying through the day as the rout deepened in China.

The Shanghai Composite Index .SSEC slumped nearly 5 percent at one point to its lowest level since mid-2016, while Hong Kong's Hang Seng .HSI shed 3 percent.

“China’s economy has already been clouded by a sharp slowdown in fixed asset investment growth due to the government’s deleveraging drive, a problematic property sector, a mounting debt burden and rising credit defaults,” economists at Nomura wrote.

“The rising risk of a disruptive trade conflict makes a bad situation tentatively worse.”

Japan's Nikkei lost 1.8 percent, South Korea's KOSPI retreated 1.3 percent while Australian stocks bucked the trend and added 0.1 percent helped by a depreciating currency and an overnight bounce in commodity prices.

The dollar fell 0.75 percent to 109.715 yen JPY= following Trump's tariff comments. The yen is often sought in times of market turmoil and political tensions.

The euro was steady at $1.1622 EUR=.

China's yuan skidded to a five-month low. The Australian dollar AUD=D4, often seen as a proxy to China-related trades, brushed a one-year low of $0.7381.

In commodities, crude oil markets remained volatile ahead of Friday’s OPEC meeting at a time when Russia and Saudi Arabia are pushing for higher output.

Brent crude futures fell 0.8 percent to $74.76 a barrel after rallying 2.5 percent overnight, while U.S. light crude futures retreated 0.9 percent to $65.27.[O/R]

Lower-risk assets gained on the latest round of trade threats.

Spot gold XAU= was up 0.35 percent at $1,282.26 an ounce.

The 10-year U.S. Treasury note yield touched 2.871 percent, its lowest since June 1.

Reporting by Shinichi Saoshiro

Monday, 18 June 2018

Dollar stays near a seven-month peak, but trade tensions limit gains

TOKYO (Reuters) - The dollar edged up towards a seven-month high on Monday as investors bet the United States and China would avoid a full-blown trade war, although tensions between the two slowed its gains.

The dollar index versus a basket of six major currencies crept up 0.1 percent to 94.862.

The index was close to 95.131, a peak scaled on Friday, thanks to the dollar soaring more than 1 percent last week after the U.S. Federal Reserve gave a hawkish signal on interest rates while the European Central Bank struck a dovish tone.

On top of last week’s Fed, ECB and the Bank of Japan policy meetings, the currency markets also weighed a U.S.-North Korea summit and the renewed trade tensions between the world’s two biggest economies.

The greenback navigated through those events, last of which was a decision by the United States on Friday to enact tariffs on $50 billion in Chinese goods. Soon afterward, China’s official Xinhua news agency said Beijing would impose 25 percent tariffs on 659 U.S. products, ranging from soybeans and autos to seafood.

“The reaction by currencies to the trade developments has been mostly limited as the U.S. measure and China’s response were in line with expectations,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

“A further escalation of U.S.-China trade tensions is of course a risk scenario. But the current tariffs, even if implemented, will hardly dent the global economy and the market also has to ponder about a scenario in which the two countries try to defuse tensions.”

The dollar was down 0.2 percent at 110.44 yen, weighed down as risk appetites cooled on the back of falling Tokyo shares.

The Nikkei fell on Monday with sentiment hurt by a combination of trade concerns and a strong earthquake that hit the western Japanese city of Osaka.

Even when natural disasters and regional tensions hit close to home, the yen is often viewed as a safe haven currency, partly because of the resilience provided by Japan’s current account surplus.

Despite the slip, the dollar managed to stay in reach of a three-week high of 110.905 yen brushed on Friday.

The euro fell 0.15 percent to $1.1592, extending losses after sliding 1.3 percent the previous week after the ECB signalled it will keep interest rates at record lows well into next year.

Commodity-linked currencies sagged on the back of sliding crude oil prices.

The Canadian dollar traded at C$1.3184 per dollar after retreating to a one-year low of C$1.3210 on Friday.

The Australian dollar was little changed at $0.7442 after plumbing a five-week low of $0.7426 and the New Zealand dollar lost 0.25 percent to $0.6928 .

Brent crude futures fell to a six-week low of $72.45 a barrel on Monday in the wake of reports that top suppliers Saudi Arabia and Russia would likely increase production at the June 22 OPEC meeting in Vienna.

The OPEC meeting “will be one of this week’s key events due to the way oil prices shape economic and price views and thus impact yields and currencies,” said Koji Fukaya, president at FPG Securities in Tokyo.

Reporting by Shinichi Saoshiro

Asian shares fall as U.S.-China trade spat escalates

TOKYO/SYDNEY (Reuters) - Asian shares fell on Monday after U.S. President Donald Trump cranked up trade tensions by going ahead with tariffs on Chinese imports, prompting Beijing to immediately respond in kind.

Fears of a global trade war added to pressure on oil prices, which extended Friday’s big fall, while the dollar retreated from near 3-week highs against the safe haven yen.

MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 0.4 percent to its lowest level since May 31.

Financial markets in China and Hong Kong were closed for Dragon Boat festival holiday. South Korea’s Kospi index slipped 0.5 percent while Australian shares eased 0.1 percent.

Japan’s Nikkei sank 0.9 percent as worries over growing protectionism overshadowed stronger-than-expected export data.

U.S. E-mini S&P futures were down 0.5 percent in early trade, suggesting a weaker start on Wall Street.

“The on-again off-again possible global trade war is looking to be back on again as the U.S. and China announced tariffs on each other’s imports,” said Nick Twidale, Sydney-based analyst at Rakuten Securities Australia.

“This looks set to be the main theme that investors will focus on...with any further escalation in tension adding to the downside risk.”

Trump announced hefty tariffs on $50 billion of Chinese imports on Friday, laying out a list of more than 800 strategically important imports from China that would be subject to a 25 percent tariff starting on July 6, including cars.

China said it would respond with tariffs “of the same scale and strength” and that any previous trade deals with Trump were “invalid.” The official Xinhua news agency said China would impose 25 percent tariffs on 659 U.S. products, ranging from soybeans and autos to seafood.

China’s retaliation list was increased more than six-fold from a version released in April, but the value was kept at $50 billion, as some high-value items such as commercial aircraft were deleted.

However, many market watchers believe there is still room for compromise, suspecting Trump’s announcement was a negotiating tactic to wring faster concessions from Beijing.

Analysts say the direct impact of the tariffs may be limited, especially for the U.S. economy, which is in strong shape.

But Asia’s other trade-reliant economies and companies plugged into China’s supply chains are worried they will suffer collateral damage if world trade slows down, hurting global growth and dampening business confidence.

Shares of Japanese construction equipment makers Komatsu Ltd and Hitachi Construction Machinery tumbled 3.7 percent and 3.4 percent, respectively. Both are vulnerable to any downturns in Chinese and global capital spending.

“There are trade frictions not only between the U.S. and China but also between the U.S. and its allies. Trump could put more pressure on other countries like Japan and NATO courtiers,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management in Tokyo.

“So far investors have been escaping to high-tech shares and small cap shares. After all, money is still abundant. But investors should be cautious.”

In the currency market, the dollar was supported for now as the euro has lost steam after the European Central Bank had suggested on Thursday it would hold off raising interest rates through the summer of next year.

The euro traded at $1.1587, not far from a two-week low of $1.1543 set on Friday.

The dollar eased to 110.33 yen, having hit a three-week high of 110.905 on Friday.

The Japanese currency stayed resilient following a deadly earthquake that struck Western Japan, including Osaka, the country’s second largest urban area.

The Australian dollar, a liquid hedge for risk, slipped to a six-week trough while its New Zealand cousin fell to the lowest since end-May.

Oil prices were under pressure on fears of increased supply as two big producers - Saudi Arabia and Russia - have indicated they were prepared to increase output.

The Organisation of Petroleum Exporting Countries (OPEC), Russia and other producers are due to meet in the Austrian capital on June 22-23.

U.S. crude futures took an additional hit also as China’s retaliatory tariffs included crude oil.

U.S. crude futures dropped 2.04 percent to $63.76 per barrel, briefly touching their lowest levels since April 10.

Brent fell 1 percent to $72.67.

Reference: Hideyuki Sano, Swati Pandey

Sunday, 17 June 2018

Volcker 'fix' may cause new headaches for Wall Street

WASHINGTON (Reuters) - A proposal to simplify a rule banning banks from proprietary trading, rather than making life easier for Wall Street, could ensnare billions of dollars’ worth of assets not currently caught by the regulation.

This little-noticed wrinkle, if it were to make it into the final rule, could prompt Wall Street firms to overhaul their treasury, trading and merchant banking operations and change their accounting practices, lawyers and executives told Reuters.

On May 30, U.S. regulators unveiled a plan to modify the so-called Volcker Rule introduced following the 2007-2009 financial crisis, aiming to make compliance easier for many firms and relieving small banks altogether.

Wall Street has long complained about the complexity and subjectivity of the rule, which bans banks that accept U.S. taxpayer-insured deposits - such as Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley - from engaging in short-term speculative trading.

Republicans, the business lobby and analysts initially welcomed the proposal as a long overdue move to streamline and clarify the rule, while consumer advocates and progressive Democrats criticized it as a risky Wall Street giveaway.

But after digesting the 494-page consultation, financial industry executives and lawyers said it could actually create new headaches for big banks by banning a swath of trades and long-term investments not currently covered by the rule.

“It’s going to capture trades that wouldn’t be captured by the current regulation and that’s the bogeyman people would want to avoid in this proposal,” said Jacques Schillaci, a banking lawyer at Linklaters LLP who has studied the proposal.

The draft is subject to a 60-day consultation period during which industry participants will lobby for changes, with a final version, which is likely to be substantially revised, expected around January.

One of the most-hated aspects of the Volcker Rule presumes purchases and sales of instruments within 60 days count as proprietary unless the bank can prove they qualify for an exemption, such as market making or hedging.

This part of the rule aims to identify short-term trades that are intended to be speculative in nature, but banks say it is too subjective because it would require second-guessing traders’ intentions.

Regulators have proposed replacing it with a more objective test, based on the accounting treatment of the instruments traded.

Under the new test, trading activity by desks that daily book net realized or unrealized gains and losses exceeding $25 million is only allowed if the bank shows that trading qualifies for the rule’s exemptions.

Since the crisis, however, banks have applied this mark-to-market or “fair value” accounting treatment to a range of longer-term investments to better manage their risk.

As a result, the proposal would bring under the rule the vast majority of equity investments, derivatives and a range of fixed income securities that banks hold for many years but not to maturity.

While some of these investments, such as U.S. treasuries, other government-related securities and some derivatives, would qualify for exemptions, many would end up being prohibited given the relatively low $25 million threshold, the industry experts said.

This could disrupt how bank groups structure their trading desks and manage their strategic investments and risk. The proposal may also prompt banks to elect not to mark-to-market some assets.

Spokespeople for the Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation declined to comment.

A spokesman for the Office of the Comptroller of the Currency said the agency looked forward to reviewing stakeholder comments.

The rewrite of the Volcker Rule comes amid a broader push by President Donald Trump-appointed regulators to boost bank lending and economic growth by relaxing regulations.

Brought into law by the 2010 Dodd Frank Act, the Volcker Rule is one of the most politically sensitive post-crisis rules and any changes will be closely-watched by Democratic critics, who warn tinkering with it could increase risks to the financial system.

But the accounting snag also underscores the hidden risks of rewriting complex financial rules for the banking industry, which could confront a new set of problems - and costs - if the effort does not go as they had hoped.

“Tinkering with these rules, and regulatory change, imposes cost in and of itself,” said Cliff Stanford, a banking regulation lawyer at Alston & Bird.

Regulators have said they are very open to feedback on how to refine the draft and the banking industry will lobby aggressively on this particular issue, the executives and lawyers said.

While the banks may push the regulators to narrow the scope of the new accounting test, expand the current exemptions, or raise the $25 million limit, scrapping the test altogether will be a tough sell.

Regulators see it as a failsafe that prevents firms evading the rule and believe focusing on the accounting treatment is clearer and more enforceable than the current 60-day intent test.

“There isn’t such a thing as a perfect fix for what they’re trying to do with this aspect of the rule,” said Schillaci.

Reporting by Michelle Price and Pete Schroeder

World markets themes for the week ahead

LONDON (Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

A three-day ECB forum on central banking kicks off on Monday in Sintra, Portugal, but under a very different backdrop to last year’s summit. The ECB has warned markets it will end its bond-buying programme by the end of the year, but it has also pledged to keep rates low possibly until after summer 2019. That has cheered bond and stock markets no end, but less so the euro.

Rewind to a year ago when ECB chief Mario Draghi told the folks gathered at Sintra that deflationary forces had been replaced by inflationary ones, putting markets on alert for tweaks in the ultra-loose policy.

Yet with the end of ECB QE now in sight, a taper tantrum along the lines of last year’s appears to have been avoided. Italian bonds have just enjoyed their best week since September 2012. But Sintra speakers will still be listened to because any signs of a European growth setback could complicate the QE exit path. Next Friday’s “flash” euro zone PMI data for June may also provide some insight on this front.

More generally, Sintra is a big central banking shindig — alongside Draghi will be the Bank of Japan’s Kuroda and the U.S. Federal Reserve’s Jerome Powell. All three have had their moment in the spotlight in the past week at their central bank meetings. But another big-name governor — the Bank of England’s Mark Carney — is not scheduled to speak. His bank holds a policy meeting next Thursday, though it is not expected to change interest rates.

ECB to end bond buying but pushes out first rate hike

Euro tumbles as ECB vows to keep rates down

Several things are complicating life for Turkey’s Tayyip Erdogan before the June 24 elections. Hoping to use a beefed-up presidency to tighten his grip on the economy and monetary policy, Erdogan is finding he may not win in the first round after all. What’s more, the AK party could even lose its parliamentary majority.

Second, the lira is heading rapidly back to record lows despite 425 bps in interest rate rises. With the Fed propelling the dollar higher, the lira’s woes might continue. Its weakness will certainly exacerbate double-digit inflation. On economic growth — which Erdogan touts as one of the triumphs of his 15-year tenure — there are warnings.

Data shows Turkish growth running at 7.4 percent, making it one of the world’s fastest-growing economies. But borrowing costs have soared, with the government paying almost 16 percent for 10-year cash in local bond markets, up 500 bps since the end of 2017.

That could hint at a sharp slowdown because the growth bonanza hinges largely on credit, which is expanding around 20 percent year-on-year. Indeed, Turkey’s highly indebted companies and banks may already have run into trouble. For Erdogan, a self-declared “enemy of interest rates”, it could mean accepting more rate rises and slower growth. First though, he needs to win the election — at least in the second round.

Poll shows support for Turkey's Erdogan eroding, vote going to second round

OPEC and its oil allies meet in Vienna on Friday and Saturday next week to review their production agreement. U.S. President Donald Trump has again been blaming the group for rising oil prices - they are up almost 60 percent over the last year - so the political pressure is on to pump more.

The big producers are divided though. While Russia is pushing for a significant output hike, Saudi Arabia favours a modest one. Others like Iran, Iraq and Venezuela want no change at all.

Most oil watchers do expect an increase however, before the end of the year. Negotiations should therefore centre on the scale, timing and phasing of any output boost. Also key will be whether it is agreed by the entire group or implemented by Saudi Arabia and Russia without wider backing.

OPEC and allies could hike output gradually from July - Russia

Higher oil prices set to moderate consumption growth

Brazil, Mexico, Taiwan, Philippines, Thailand and Hungary all have central bank meetings next week and with the dollar crashing through emerging market currencies like a wrecking ball right now, what the banks do and what they say will be important.

Reuters polls show they are all expected to hold fire for now although there is an outside chance that Mexico and the Philippines could pull a surprise hikes. That means it will mostly be about the rhetoric and who might be preparing to move.

Brazil’s markets are pricing 2.5 percentage points worth of hikes between now and this time next year, and Mexico’s see around 75 basis points. Thailand and Taiwan may point to one or two hikes later in the year, and even Hungary’s central bank is expected to ditch its dovish tones in the wake of a sharp fall in the forint.

Currencies in the cross-hairs as Fed hike looms

In June 2017, when U.S. banks cleared the Federal Reserve’s annual stress test, their shares surged as the results unleashed a massive round of stock buybacks and dividend increases. Don’t look for the same outcome next week when the 2018 vintage are released.

The largest U.S. banks have notably underperformed their smaller, regional rivals so far in 2018 and even if some do get more cushion to increase their capital return programs, few analysts believe that will be enough to put them back in the lead.

A flattening yield curve and underwhelming loan growth are among the big culprits weighing on the performance of large banks, and that doesn’t look like it’s changing anytime soon.

The latest Fed data on commercial and industrial loan growth shows smaller banks holding a greater-than-4-percentage-point lead over large banks in that key lending category. Small bank C&I loan growth is up 6.7 percent year over year, while for the biggest banks it is just 2.4 percent.

And the Treasury yield curve - a key indicator of bank net interest margins - has flattened further since the Fed’s latest rate hike. The spread between 2-year and 10-year Treasury yields is below 40 basis points and the narrowest in nearly 11 years.

Reporting by Sujata Rao, Marc Jones, Dhara Ranasinghe, Marius Zaharia, John Kemp, Dan Burns; Editing by Hugh Lawson

Friday, 15 June 2018

Asian shares falter as U.S. readies China tariffs

TOKYO (Reuters) - Asian shares wobbled on Friday as investors braced for U.S. tariffs against China.

Spreadbetters expected a slightly better tone in European equities, forecasting a higher open for Britain's FTSE, Germany's DAX and France's CAC.

U.S. President Donald Trump has made up his mind to impose “pretty significant” tariffs and will unveil a list targeting $50 billion of Chinese goods on Friday, an administration official said. Beijing has warned that it was ready to respond.

While it is not clear when Trump will activate the measures, rising Sino-U.S. trade tensions will put additional pressure on China’s economy, which is starting to show signs of cooling under the weight of a multi-year crackdown on riskier lending.

Analysts said that although the expected announcement would likely not be a total surprise to markets - an initial list was released by Washington a few months ago - it would still make investors concerned that the window for averting a trade war may be closing.

The Asia Pacific MSCI index ex-Japan .MIAPJ0000PUS edged down 0.3 percent and was set for more than a 1 percent weekly loss, with many regional markets shrugging off a strong close on Wall Street.

China stocks led the losses, with the benchmark Shanghai Composite index .SSEC plumbing a 20-month low, as investors worried about the negative economic impact arising from the trade tensions with the United State.

Japan's Nikkei average and Australian shares closed up 0.5 percent and 1.3 percent, respectively.

“The implementation of tariffs on China is one of several fronts that the U.S. is battling on the issue of trade,” said Tai Hui, chief APAC market strategist at JPMorgan Asset Management, referring to the Trump administration’s tough stance toward Canada and Europe.

“This battleground could potentially expand into the auto sector given the U.S. investigation into auto imports. This is likely to weigh on market sentiment over the summer.”

The euro EUR= was headed for its worst weekly loss in 19 months after the ECB signalled on Thursday it will keep interest rates at record lows into at least mid-2019, even as it pledged to end its massive bond purchase scheme by the end of this year.

The common currency shed 1.9 percent to the dollar after the rate comments, in its sharpest daily fall in almost two years since Brexit vote shock in 2016.

In late Asian trade on Friday, the euro eased 0.2 percent to $1.1546, its lowest level since May 30.

The dollar index against a basket of six major peers rose 0.3 percent to 95.111, its highest level since November, after rallying more than 1 percent the previous day.

The 10-year German bund yield also fell to 0.424 percent from around 0.50 percent before the ECB statement.

“The ECB has made it clear that it does not want quick rate hikes, although it now considers progress towards the inflation target as ‘substantial’. Against the background of uncertainties in the world today – such as trade – this makes sense, as does the emphasis on data dependency,” said Stefan Kreuzkamp, chief investment officer at DWS.

On Wall Street, two of the three main indexes closed higher, with technology stocks leading the charge on the benchmark S&P 500.

Helping boost U.S. equities was a Commerce Department report showing retail sales rose more than expected in May, the latest indication of an acceleration in economic growth in the second quarter.

While the Fed and the ECB provided much of the week’s central bank fireworks, the Bank of Japan produced no surprises at the end of a two-day policy meeting on Friday and looked set to continue its massive asset buying programme for some time.

Markets are now tracking BOJ Governor Haruhiko Kuroda’s post-meeting briefing, which began at 0630 GMT, for clues on how long the central bank could hold off on whittling down stimulus given stubbornly weak inflation.

Oil prices were little changed as investors eyed a key OPEC meeting in Vienna. Saudi Arabia and Russia, architects of a producer deal to cut output, have indicated they want production to rise.

West Texas Intermediate crude oil futures were steady at $66.90 per barrel, while Brent was down 0.1 percent at $75.86.

Many markets in Asia were closed on Friday for holidays celebrating the end of Ramadan.

Reporting by Tomo Uetake

European shares rally after ECB pushes back rate hike bets

MILAN/LONDON (Reuters) - European shares jumped on Thursday after the European Central Bank said interest rates would stay at record lows at least through the summer of 2019 as it announced an end to its massive stimulus plan.

Stock benchmarks across Europe enjoyed their best day in 2-1/2 months as they benefited both from a weaker euro and the surprise extension of lower interest rates.

The pan-European STOXX 600 and the euro zone STOXX  jumped 1.4 and 1.3 percent, while the exporter-heavy German index gained 1.7 percent as the euro fell to a session low following the ECB's statement.

Along with France’s CAC 40, they had their strongest gains since April 5.

Edmund Shing, head of equity derivatives at BNP Paribas, said low rates for longer was a boon for equities as it ensured liquidity remained strong.

“One of the key drivers for risk assets has been and continues to be liquidity, beyond all other things. The longer they delay rate hikes the longer liquidity stays decent,” he said.

“The hawks had been guiding for a June hike before the meeting and given the clear guidance the ECB gave today on interest rates, it had to be priced out,” said AFS Group analyst Arne Petimezas.

“It doesn’t seem like we’re at the stage where the hawks are on top of things,” he added.

Interest-rate sensitive sectors such as autos and utilities surged, while the euro zone’s banking stocks, which suffer from low interest rates, fell 0.2 percent, among the only stocks in negative territory.

Germany’s Commerzbank, Spain’s Bankia, and Italy’s Unicredit were the biggest fallers, down 1.2 to 2 percent.

“It’s a disappointment” for banks, said BNP Paribas’ Shing, adding that the ECB’s negative deposit rate costs banks money.

“The faster the deposit rate gets back to 0, the better for banks’ profitability.”

If the ECB succeeds in supporting the economy and productivity, however, this could have positive knock-on effects for banks through boosting demand for financing and alleviating the burden of non-performing loans, he added.

The autos sector rose 1.8 percent, its strongest gains in 2 1/2 months, also boosted by a weak euro.

Rolls-Royce gained 6.5 percent after saying it would save 400 million pounds ($535 million) a year by cutting 4,600 jobs in its latest attempt to simplify the business and generate more cash.

“After spending around four and half years in purdah, an incremental 400 million pounds of FCF (free cash flow) would allow Rolls-Royce to take a significant step toward meeting its financial targets,” Jefferies analysts said.

“That should then mean Rolls-Royce can make an adequate annual return to shareholders through the dividend.”

Danish hearing equipment maker GN Store Nord  was the top gainer on the STOXX, up 12.2 percent after it upped its 2018 sales and profit forecasts for its headset business.

Shares in heavyweight drugmaker GSK rose 2.3 percent. Investors welcomed news its two-drug treatment for HIV met its main goal in late stage studies - a boost after regulators warned of possible birth defects from one of the two drugs.

On the DAX, Volkswagen rose 2.2 percent. It fell in early trading after the carmaker was fined one billion euros over diesel emissions cheating.

($1 = 0.7482 pounds)

Reporting: Danilo Masoni, Helen Reid