China stimulus, German rally help European stock end higher

By Sruthi Shankar

(Reuters) - European stocks finished higher for a third day on Tuesday, as German shares caught up with a global stock rally after a holiday on easing trade tensions, while fresh stimulus for China's slowing economy boosted the basic resources sector.

The pan-European STOXX 600 index closed at its highest level since May 17, with miners, auto stocks and chemical companies tacking on biggest gains after reports that Beijing was opening the door to more spending by local governments.

Also buoying sentiment was U.S. President Donald Trump's decision last week to hold off on imposing import tariffs on Mexico which sparked a relief rally across markets on Monday.

Trading after Whit Monday holiday, Germany's trade-sensitive DAX rose 0.9%, helped by gains in car makers BMW, Daimler and Volkswagen AS.

Shares in industrial conglomerate ThyssenKrupp, which generates about $1 billion euros in Mexico, jumped 4.8% to the top of the DAX index.

"The Bank of China came out with some measures for stimulus and therefore some of the more cyclical stocks are bouncing off oversold levels," said Will James, senior investment director for European equities at Aberdeen Standard Investments.

"All these stocks had a challenging May and one of the reasons for the markets' delayed reaction is quite a lot of markets in Europe were closed yesterday."

European stocks have climbed over 4% from their early June lows on positive trade headlines and the prospect of interest rate cuts by the U.S. Federal Reserve.

Worries about the impact of tensions between the United States and China on the pace of growth in the world's major economies sent European stocks down about 6% in May, their worst month in more than two years.

Investors are now betting that the U.S. central bank will ease monetary policy to counter any global slowdown from the trade wars between the world's major economies.

Trump said on Monday he was ready to impose another round of punitive tariffs on Chinese imports if he cannot make progress in trade talks with Chinese President Xi Jinping at the G20 summit.

"The prospect of potential loosening of policy to avert a further scaledown of the global economy, that's the reason why there has been a bit of a sentiment shift in European markets," James added.

Madrid's bank-heavy IBEX was a laggard, after Morgan Stanley lowered its earnings estimates for Spanish banks for 2020 and 2021, factoring in a flatter yield curve as a result of the European Central Bank's swing towards taking new steps to reduce interest rates.

Helping Copenhagen-listed shares up 2.5%, Novo Nordisk rose 5.2% as data on cardiovascular outcomes from competitor Eli Lilly's diabetes drug was seen as underwhelming.

Hugo Boss rose 4.3% after shares of the German fashion house were upgraded to "equal-weight" from "underweight" by Morgan Stanley for the luxury retailer's strategic plan to reposition the brand under two labels.

Limiting gains on London's FTSE midcap index, fashion retailer Ted Baker tumbled 29% after it issued a lower annual profit forecast, citing an "extremely difficult" start to 2019.

(Additional reporting by Amy Caren Daniel and Agamoni Ghosh in Bengaluru; graphics by Helen Reid in London; editing by Patrick Graham and Ed Osmond)