Rallying telecom stocks and a bullish start to the new earnings season propelled Europe's top shares to fresh closing highs on Wednesday.
The STOXX Europe 600 telecoms index rose 2.6 per cent, the top sectoral gainer, with traders citing a Financial Times report saying top telecommunication firms were discussing a pan-European infrastructure network to unite Europe's disjointed national markets as a reason for the rise.
Telecom Italia and France Telecom gained 8.8 and 4.3 per cent respectively.
"What the share prices reflect now is a chance that these companies could reduce their costs by building a single network across Europe," John Karidis, analyst at Oriel Securities, said.
The report tempted investors back into the worst performing sector of the past year, when it recorded losses of 19 per cent against a rise of 18 per cent on the broad Euro STOXX.
The FTSEurofirst 300 closed up 7.78 points, or 0.7 per cent at 1,167.98, surpassing Friday's 22-month closing high, also helped by a bullish start to the U.S. earnings season after aluminium giant Alcoa's in-line profits and above-consensus revenues.
Equities are being lifted by the apparent reduction in risk posed to the macro economy from the euro zone debt crisis and budget issues in the United States.
"It has been a good start to 2013 and equity investors have been buying into the idea that we have negotiated the worst case (macro economic) scenario," William De Vijlder, chief investment officer for strategy & partners at BNP-Paribas Investment Partners, said.
With perceived macro risk subsiding, Banks have been the standout performers over the last three-months rising more than 14 per cent and adding 2.3 per cent on Wednesday.
Fresh gains were sparked earlier this week by news that incoming global bank liquidity rules will be softened, giving the lenders extra breathing space and room to grow profits.
Lloyds Banking Group rose 4.9 per cent after UBS upgraded the UK's part-state-owned lender to "buy" from "neutral" to reflect the better growth and profitability picture.
UBS also lifted its target prices for Royal Bank of Scotland and Barclays, while Spanish bank Caixa topped the European risers, up 11.8 per cent.
"We favour stocks that were hammered in the past years, the cheap ones, the ones with the biggest upside potential. Cyclical and banking shares, despite their recent jump, still trade at a 30-50 per cent discount to growth stocks," Malik Haddouk, head of global balanced management at CPR Asset Management, which has 21 billion euros under management, said.
Although macro economic concerns have eased as central banks have stepped in to support the financial system and attempt to boost global growth, there are that the problems have only been pushed further down the road rather than being outright solved.
Hedge funds are betting that a rally in U.S. stocks after a retreat from the "fiscal cliff" will reverse as doubts grow that politicians are ready to sacrifice party interests to keep the world's economic engine running, early data showed.
Spain's benchmark IBEX equity index could fall by more than 10 per cent in 2013, with fears over Spain's sovereign debt problems likely to resurface as the year progresses, said Mirabaud Securities' Spanish equities analyst Ignacio Mendez.
Central Banks remain acutely aware of the need to continue to support the economy and the FTSE 100 hit a four-and-a-half year high while sterling fell to a one-month low versus the dollar with some betting that the Bank of England could ease monetary policy in the near term, traders said.
Reflecting unease over the outlook and consumers feeling the pinch of austerity measures, UK retailers continued to suffer as Sainsbury's, down 2.9 per cent, reported slowing growth.
Food retailing peers WM Morrison, which saw its trading statement disappoint earlier this week, and Tesco - which updates the market on Thursday - slid 0.5 per cent and 0.7 per cent respectively
Worries over the sustainability of earnings and dividends saw Aviva shed 2.2 per cent as Barclays cut its recommendation on the UK insurer to "underweight" from "equalweight".
"We see positive earnings and dividend momentum as key drivers for insurance stocks in 2013 and we believe Aviva offers neither," Barclays said in a note.