LONDON: European shares closed at their highest in more than a year on Thursday as Italian stocks surged on relief that Rome had avoided European Union disciplinary action and rising expectations of looser monetary policy by major central banks.
The pan-European STOXX 600 index rose 0.1%, extending gains to a sixth straight session on optimism that Christine Lagarde will stick to the ECB's dovish stance as the central bank's next chief.
Milan's MIB <.FTMIB> rose 1% to hit its highest level in almost a year, while its bank index <.FTIT8300> soared 3.4% after Italy persuaded the European Commission that new measures submitted this week would help bring its growing debt in line with EU fiscal rules.
While Italy has dodged a bullet for now, disciplinary action could be back on the agenda in the autumn when the 2020 budget is drafted, ING senior economist Paolo Pizzoli said.
"As things stand, crafting a fiscally sound 2020 budget will prove challenging."
Trading volumes were thin, with U.S. financial markets shut for Independence Day.
Expectations of lower borrowing costs have helped European equities recover from May's losses and resume their 2019 rally, with the STOXX 600 up more than 16% this year.
Meanwhile, trade-sensitive autos sector <.SXAP> rose 0.4% on news that top representatives from the United States and China are arranging to resume talks next week.
Also helping the auto stocks were gains in French car parts company Valeo after it won 500 million euros ($564 million) worth of orders for its 'Lidar' sensors.
Capping gains were Spanish utilities as Enagas and Naturgy which slipped 4.3% and 3.4% respectively on a media report that Spain's antitrust authority would propose cuts to allowed returns of electricity and gas networks.
British Airways-owner IAG and Coca-Cola HBC were the top fallers on the pan-European benchmark index as their shares traded ex-dividend.
Britain's mining stocks tugged the main index lower on Thursday, while shares of IAG and Coca Cola HBC slid as they traded ex-dividend, though several investors stayed on the sidelines during the U.S. market holiday.
The FTSE 100 <.FTSE> inched 0.1% lower but still hovered around a 10-month high and the FTSE 250 <.FTMC> was roughly flat.
"It is perhaps a sign of how much trading has been driven by the U.S. in the last couple of months that the absence of the American markets due to Independence Day left their European counterparts in neutral," Spreadex analyst Connor Campbell said.
British Airways owner International Consolidated Airlines Group skidded 5.9% on its worst day since October 2017. Coca-Cola's leading bottler Coca Cola HBC slipped 6.7%.
The slide in stocks trading without a dividend entitlement kept the main index from rising for a fifth straight session even though a softer-than-expected U.S. jobs report overnight spurred hopes of interest rate cuts by the Federal Reserve.
Companies in the United States added more jobs in June, but fewer than analysts had forecast.
UK markets have been sensitive to dovish signals this week as expectations of near-term rate cuts by the Bank of England were raised by weak economic data and remarks by Governor Mark Carney.
In June, the FTSE 100 had enjoyed its best month since January amid rising hopes that central banks around the world would loosen policy to counter slowing growth.
An index of miners <.FTNMX8350> fell 1.4% as copper prices slipped on a jump in London Metal Exchange inventories.
Israel-focused gas driller Energean surged 13.7% to an all-time high after saying it would buy the oil and natural gas unit of Italy's Edison SpA .
Persimmon , Britain's second-largest homebuilder, shed 1.2% after it posted lower first-half revenue as increased focus on quality and improving customer service slowed order intake.
"The pressures of the step up in customer service continue to weigh on revenues... the question remains of how long until customer service initiatives impact profitability," Jefferies analysts said.
Shares of blue-chip rivals Taylor Wimpey and Berkeley gave up 1% each.
Government bonds held near multi-year lows on Thursday on bets the U.S. Federal Reserve would cut interest rates this month and that other major central banks would embrace looser monetary policy, pushing world stocks to new 18-month highs.
Germany's 10-year government bond yield, a benchmark for euro zone debt, fell to -0.4% and matched the European Central Bank's deposit rate for the first time -- a sign that markets are expecting rate cuts.
Other benchmark debt yields also held near record lows in the wake of their recent rally. U.S. 10-year Treasury notes had hit their lowest since November 2016 on Wednesday, pushed down by bets that the European Central Bank's next head will maintain a dovish policy stance to buoy the euro zone economy.
"For central banks, everyone is expecting dovish moves, not only for U.S. but also for Europe and even Japan," said Christophe Barraud, chief economist at Market Securities in Paris. "Everybody is a optimistic for quick central bank moves."
The fall in U.S. Treasuries came after a report showed U.S. companies added fewer jobs than expected in June, raising concerns the labour market is softening even as the current U.S. economic expansion marked a record run last month.
With Wall Street closed for the Independence Day holiday, investors said they were now focused on Friday's U.S. non-farm payrolls, which economists expect to have risen by 160,000 in June compared with 75,000 in May.
Separately, U.S. President Donald Trump on Wednesday repeated his call for the United States to match what he says are efforts by China and Europe to manipulate currencies and pump money into their economies.
Government borrowing costs in the euro zone have fallen to record lows after EU leaders agreed late on Tuesday to name Christine Lagarde as the ECB's new president.
Lagarde, the current International Monetary Fund head, is widely expected to maintain the dovish stance of current ECB President Mario Draghi.
The action in bond markets buoyed stocks. MSCI's all-country world index <.MIWD00000PUS> eked out a 0.1% gain after hitting its highest since February last year a day earlier.
Equity markets across Europe were flat, with the Euro STOXX 600 <.STOXX> unchanged amid thin volumes. The three major U.S. stock indexes had finished at record closing highs on Wednesday.
Italian 10-year bond yields stayed close to their lowest since late 2016 after the European Commission dropped its threat to discipline Rome over its public finances, pushing the country's main bourse <.FTMIB> to a new two-month peak.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.2%.
For an interactive version of Bund yield set to fall below ECB deposit rate, click here https://tmsnrt.rs/2YtKj7d.
FLAT DOLLAR, EURO
Expectations for rate cuts by the Fed saw the dollar drift away from recent highs, though currencies were by and large quiet in early European trade.
The dollar index <.DXY> against a basket of six major currencies was unchanged at 96.711.
The euro traded at $1.1284 , a touch higher than its two-week low of $1.1268 touched on Wednesday.
FX strategists said that although the drop in U.S. Treasury yields overnight was negative for the dollar, softness in other currencies was lending some support.
"We are seeing some euro weakness and some dollar weakness, and the two are cancelling each other out," said Thu Lan Nguyen, FX strategist at Commerzbank.
"What is happening in U.S. and euro zone monetary policy will also determine what happens in smaller countries," she added.
In commodity markets, oil fell on data showing a smaller-than-expected decline in U.S. crude stockpiles and worries about the global economy.
Brent crude futures , the international benchmark for oil prices, were flat at $63.84 per barrel by 1109 GMT.
To read the full story and other premium content