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The pan-European STOXX 600 index was up 1.3 percent in morning
trade, reversing initial losses, with the banking sector
providing the biggest lift in terms of index points, even though
trading was volatile.
Italy's banking index fell as much as 4 percent in early deals
on worries that efforts to clean up bad debts and raise capital
could be derailed by renewed political uncertainty. The index,
which has lost about half of its value this year, briefly turned
positive and was last down 0.7 percent. Europe's bank index
<.SX7P> rose 1.2 percent.
Italian Prime Minister Matteo Renzi said he would resign after
suffering a crushing defeat on Sunday in a referendum on
constitutional reform, raising worries of early elections in
2017 and a possible failure of lender Monte Paschi's
recapitalization plan.
But traders said shares changed direction as short covering
kicked in, with investors attracted by low valuations and
reassured by expectations the European Central Bank (ECB) would
step in if needed.
"It's clearly tempting to buy back Italian shares on the dips
especially if one bears in mind (ECB chief Mario) Draghi's
'whatever it takes' stance," said Stephane Ekolo, chief European
strategist at Market Securities.
Some investors also said they did not expect early elections in
Italy, giving time to solve its bank problems.
"We'll probably see .. a technocratic government to rule until
the next general election in 2018. Italy, the EU and the ECB may
also need to help the Italian banking sector with their ongoing
recapitalization efforts," Columbia Threadneedle fund managers
Philip Dicken and Adrian Hilton said in a note.
ECB Governing Council member Ewald Nowotny said market concerns
about Italy's financial sector should be kept in perspective and
any problems there were manageable. The central bank holds a
policy meeting on Thursday.
Monte Paschi was flat after opening sharply lower. Morgan
Stanley said it saw state-aid for the troubled lender as
increasingly likely, adding the referendum's outcome made it
more difficult for the bank to find an anchor investor.
The mining sector index <.SXPP> was up 1.6 percent, helped by
rising copper prices, while auto stocks <.SXAP> rose 2.5 percent
as the export-oriented sector was helped by a weaker euro.
Luxury goods groups were also in demand, helped by upbeat broker
comments. Burberry <BRBY.L> rose 2.6 percent after the Financial
Times said the company had rejected multiple takeover approaches
from U.S. fashion accessories group Coach <COH.N>.
(Additional reporting by Maria Pia Quaglia; Editing by Mark
Potter)
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