By Sara Sjolin, MarketWatch
LONDON (MarketWatch) -- A surprisingly upbeat reading on Germany's business climate sent European stock markets toward weekly gains on Friday, with investors also paying close attention to Italian elections over the weekend.
The Stoxx Europe 600 index rallied 1% to 287.62, climbing back after a 1.5% drop on Thursday.
European stock markets were on track for nudging out a 0.1% weekly gain, following a week of sharp swings as investors worried about the outcome of the Italian election on Sunday and Monday. Global financial markets have moved broadly higher this year, blessed with a strong risk-on sentiment as signs of economic recovery lift investors' spirits. However, mixed European data and worries over the U.S. Federal Reserve monetary-easing program sent markets wobbling this week.
"I think investors have been slightly unclear about what direction to take ahead of the Italian election this weekend. There's a lot of uncertainty," said Guy Foster, head of portfolio strategy at Brewin Dolphin.
"Yesterday, you had the minutes from the Fed and investors are always desperate for signs about what will happen to quantitative easing. They are looking for a ghost that is not really there. The minutes didn't really suggest anything new, but it just happened in addition to no other good news that day," he added. "Investors are thinking this is a good opportunity and are taking advantage of the little window that has opened."
Among notable movers in the pan-European index, shares of Elan Corporation PLC rose 4.3%. The biotech firm said it would buy back $1 billion of its own shares, using money from the sale of its multiple-sclerosis drug Tysabri.
Pointing in the other direction, shares of Air France-KLM dropped 6.9%, after the airline said its loss widened in 2012 compared to 2011
For the broader European stock market, upbeat data out of Germany helped lift the trading mood. The Ifo Business Climate index jumped to 107.4 in February, exceeding expectations of a 104.7 reading.
Investors also trained their attention on general elections in Italy over the weekend, with worries a new government possibly led by former Prime Minister Silvio Berlusconi will fail to follow up on the country's current reformist drive. Several parties including Berlusconi's have openly campaigned against the austerity measures the nation had to implement in order to meet its EU commitments.
"The market is currently pricing in a rather constructive election outcome, in our view. However, we still see a realistic risk either of a hung parliament, or a potentially difficult and protracted negotiation process as [centre-left candidate Pier Luigi] Bersani and [Prime Minister Mario] Monti seek to form a coalition," analysts at RBC Capital Markets said in a note.
"That leaves us remaining cautious about peripheral exposure in outright terms and in [yield spreads between Italian government bonds and German bunds] in the near term," they said.
Polls aren't allowed in the final weeks leading up to the election in Italy, but polls published before the cutoff date put a center-left coalition led by Bersani in the lead.
Italy's FTSE MIB index posted steep losses this week, on track for a 1.9% weekly loss, but was up 1% to 16,173.56 on Friday.
Among other country-specific indexes, France's CAC 40 index added 1.5% to 3,680.44, with banks on the rise. Shares of Société Générale SA rose 1.2% and BNP Paribas SA gained 1.7%.
Shares of Alcatel-Lucent slipped 1.1% after the telecom-equipment maker appointed Michel Combes, former head of Vodafone Group PLC's (>> Vodafone Group plc) European operations, as new chief executive. Additionally, HSBC lifted the stock to neutral from underweight.
In Germany, Deutsche Bank AG (>> Deutsche Bank AG) climbed 1.2%. The DAX 30 index traded 0.6% higher at 7,631.33.
And in the U.K., J Sainsbury PLC gained 1.9%, after Citigroup lifted the supermarket retailer to buy from neutral.
The FTSE 100 put on 0.4% to 6,318.77.
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