Europe bounces back with big gains

LONDON, England (Reuters) -- European shares posted their largest one-day rise in 15 months on Monday, recovering some of last week's losses as a liquidity injection from central banks soothed investor nerves, while bank stocks rallied.

Bank stocks were the top performing sector on the European equities market. Royal Bank of Scotland, HSBC and Barclays were all among the top weighted gainers on the FTSEurofirst 300, pushing the broader European banking sector up 2.5 percent.

The FTSEurofirst 300 index of top European shares closed up 2.29 percent at 1,513.27 points in its largest daily percentage gain since May 2006.

The index shed 3 percent on Friday in its worst one-day slide in over four years.

"It's going to be volatile, as credit markets sort themselves out, but we believe that the underlying strength of the global economy and attractive global equity valuations will stop markets short of meltdown," said Tim Harris, markets strategist at JPMorgan Private Bank.

The FTSEurofirst 300 is up 1.7 percent so far this year, having briefly wiped out all of this year's gains on Friday, but is still nearly 8 percent down from this year's peak at 1,635.6.

A host of central banks pumped extra cash into the banking system last week and on Monday to stave off sudden rises in overnight lending rates, helping soothe investor concern about access to liquidity after a number of financial institutions revealed exposure to subprime market turmoil last week.

Mining stocks rose sharply, led by near-11 percent rises in the shares of copper miners Kazahkmys and Antofagasta, while Anglo American rose 8.3 percent and Rio Tinto rose 7 percent.

The DJStoxx index of European basic resources companies rose 6 percent.

Morgan Stanley said in a note it was time to start buying shares, its first asset allocation shift since January.

"The risk-reward of buying equities on a 6-12 month view is much better now than a few months ago," strategist Teun Draaisma wrote, changing the bank's view of equities to "overweight" from "neutral," downgrading cash and keeping bonds underweight.

"Companies still have strong balance sheets, strategic M&A has further to go, sovereign wealth funds have significant amounts of cash to buy equities with, we see no recession coming, emerging markets are in great financial shape, the earnings yield/bond yield gap is still positive," he said.

Draaisma said the bank was going overweight on financial shares, and said overall, he still preferred large caps to small and mid-caps.

A 1.8 percent rise in the price of Brent crude lifted index-heavyweight oil stocks, with BP gaining 2.65 percent, Royal Dutch Shell advancing 3.2 percent and Total rising 2.6 percent.

But fears over the extent of damage to Europe's financial system from exposure to the U.S. subprime problem lurked.

Shares in Germany's Postbank fell nearly 1 percent after the bank said it had taken onto its own books 600 million euros in exposure to two investment vehicles run by crisis-hit German peer IKB.

Other banks recovered some of last week's losses.

BNP Paribas gained 2.6 percent, Deutsche Bank gained 1.3 percent, and Commerzbank rose 2.7 percent.

Britain's FTSE 100 ended 3 percent higher, France's CAC 40 gained 2.2 percent and Germany's DAX rose 1.8 percent. E-mail to a friend

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