European shares rise in banks, commodity boost; FTSE 100 holds gains after PM resigns

By Devik Jain and Susan Mathew

(Reuters) -European shares extended a rally on Thursday, as surging oil and metal prices lifted commodity stocks while a jump in banks boosted Italy's main index 3.1%, its biggest daily increase since mid-March.

The continent-wide STOXX 600 index was up 1.9% on broad-based gains. Miners jumped 5.4% as copper rallied from 20-month lows on hopes that demand would improve in China. The energy sector surged 4%.[MET/L][IRONORE/][O/R]

Banks jumped 3.4%, the biggest boost to the STOXX 600. Italy's banks-heavy MIB index bounced further off November 2020 lows hit this week.

Trading remained volatile, as investors wondered whether market valuations have turned attractive after a sharp selloff on concerns central banks could trigger a recession with aggressive rate hikes to tame inflation.

European Central Bank policymakers debated flagging a larger interest rate hike for July and were keen to keep the door open to a bigger moves in subsequent meetings, minutes of their June meeting showed.

"The key question is will inflation come down first or do we need a recession for inflation to come down afterwards?," said Dhaval Joshi, chief strategist at BCA Research.

"The problem we have is if economies enter recession, then we're going to see quite a lot of profit downgrades."

As of Tuesday, second-quarter earnings for STOXX 600 companies are expected to climb 19.2% year-over-year. Excluding the energy sector, earnings are expected to rise 2%, according to Refinitiv data.

London's FTSE 100 rose 1.1% despite UK Prime Minister Boris Johnson's resignation, as analysts said the move was expected given several ministers from his government quit in recent days after the latest in a series of scandals sapped their willingness to support Johnson.

"It is possible that the latest political upheaval will lead to somewhat looser fiscal policy than otherwise (in the UK), " said Capital Economics in a note. "The net result... will be somewhat stronger inflationary pressures."

"Headwinds from rising interest rates and weakening economic growth will be a nasty combination for the FTSE 100, which we forecast to drop by another 4% or so this year, to 6,900."

Chipmakers STMicroelectronics, BE Semiconductors, ASM International and ASML Holding gained between 2.9% and 4.6% after Samsung Electronics Co Ltd posted its best April-June profit since 2018.

Shares of Chr Hansen slid 9.8% to the bottom of STOXX 600 after the Danish food ingredients maker reported disappointing quarterly results and narrowed its organic revenue growth target for 2021/22.

(Reporting by Devik Jain in Bengaluru; Editing by Sherry Jacob-Phillips and David Gregorio)