10-10-13 12:15 PM EDT | Email Article

By Sara Sjolin, MarketWatch


LONDON (MarketWatch) -- After three days mired in the red, European stock markets posted sizable gains on Thursday, driven by optimism U.S. lawmakers are getting closer to an agreement on lifting the debt ceiling and reopening the government, as the shutdown moved into Day 10.


The Stoxx Europe 600 index rallied 1.7% to 310.29, marking the best daily performance in more than a month.


"There's a sense today that there might be some movement politically in the U.S. and that's the news dominating the agenda and the market mood at the moment," said Neil Wilkinson, senior fund manager at Royal London Asset Management.


"All sensibility suggests they will find a solution. That the market is so strong today is some sort of indication of how sensitive we are to the U.S. political landscape at the moment," he added.


He also pointed to several reasons to be upbeat on European equities in general:


"The macro risk in Europe has receded and the political risk has receded. It was a pretty good result for [German Chancellor Angela] Merkel and we will probably get a coalition announcement in coming weeks. The Italian situation has resolved itself and economic data over the last three months are getting better. So all the indicators from the political, macro and economic perspectives are pointing in the right direction," he said.


Banks and drug makers helped lift the pan-European benchmark, with shares of drug maker Sanofi SA (SNY) up 1.3% in Paris, Commerzbank AG rising 5.9% in Frankfurt, and HSBC Holdings PLC (HBC) up 1.4% in London.


Shares of CGG (GGY) rose 2.1% after the oil-field surveyor said third-quarter vessel-production rate rose to a record 94%, up from 90% in the same quarter last year.


U.S. shutdown -- Day 10


More broadly, markets tracked developments in the U.S., where House Republican leaders offered President Barack Obama what they called a "good faith" proposal to temporarily increase the debt limit and negotiate a budget deal. The borrowing limit is set to be reached on Oct. 17, unless Washington agrees on measures to raise the ceiling. A failure to lift the debt limit could lead the U.S. into a technical default, which some fear could drag the economy into a new recession.


Lawmakers have scrambled to resolve the government shutdown -- now on day 10 -- which came after the two sides failed to agree on a budget for the new fiscal year. Obama called congressional Democrats to the White House for a Wednesday afternoon meeting and invited the Republicans for Thursday.


U.S. stocks rallied on Wall Street.


Bank of England stands pat


Back in Europe, the Bank of England left its key lending rate at a record low of 0.5% and made no changes to its 375-billion-pound ($598 billion) asset purchases, as was widely expected.


The central bank in August tied the interest rate to the level of U.K. unemployment, saying a rate hike is unlikely before the joblessness level falls below 7%. The bank forecast this wouldn't happen until 2016, but with recent upbeat data and increasing signs the U.K. economy is recovering, market participants speculate a rate hike is on the cards before that.


"If the current buoyant pace of growth signaled by the business surveys persists, we may soon see the Bank becoming increasingly confident that the economy can withstand rate hikes earlier than outlined in its current forward guidance," said Chris Williamson, chief economist at Markit, in a note.


The U.K.'s FTSE 100 index closed 1.5% higher at 6,430.49.


On the data front, industrial production in France rose 0.2% in August from July, when it fell 0.6% on the month. Economists polled by Dow Jones Newswires had forecast on average a 0.6% rise in industrial output in August.


France's CAC 40 index jumped 2.2% to 4,218.11. Arkema SA climbed 4.7% in Paris after UBS lifted the chemicals firm to buy from neutral because the "stock is undervalued at current levels."


Germany's DAX 30 index rallied 2% to 8,685.77. Shares of Rheinmetall AG fell 0.9% in Frankfurt after Moody's Investors Service late Wednesday cut the automotive-parts supplier and defense equipment firm to Ba1 with a stable outlook.


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(END) Dow Jones Newswires

October 10, 2013 12:15 ET (16:15 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.
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