European stocks rose early on Monday as a constructive start to budget talks in the United States triggered a broad-based rebound from a 3 1/2-month low.
On Friday, leaders of the U.S. Senate and House said they would be flexible in efforts to settle policy differences to avert a $600 billion 'fiscal cliff' of tax hikes and spending cuts, which could send the world's largest economy into recession if no agreement is reached.
Continue Reading Below
"Both sides are saying the right thing: that they are open to compromise," Dan Morris, a global strategist at JPMorgan Asset Management, said.
"We had a selloff and that was the opportunity for some people to get back in at a better price and if we get some more (selling) I think one should do the same."
The pan-European FTSEurofirst 300 index, which had fallen 2.7 percent in the previous week on concerns about the fiscal cliff, was up 1.2 percent at 1,080.45 points at 1137 GMT.
All sector indices on the pan-European STOXX 600 index were in positive territory, led by shares that depend on economic growth, such as auto stocks and banks.
Curbing gains on the index was Norwegian offshore oil engineering group Subsea 7, which warned sales next year could be hit by bottlenecks and delays on projects, temporarily sending its shares to a three-month low in volume 120 percent the full-day average.
JPMorgan's Morris expected high single-digit returns for global equities next year and preferred U.S. equities to their European counterparts thanks to their superior earnings prospects and expectations the former would benefit more from a low bond yield environment in the United States as a result of the U.S. Federal Reserve's asset purchase programme.
Companies in the STOXX 600 index were expected to report a 9.4 percent increase in earnings next year, compared to 10.5 percent growth for stocks in the U.S. Standard & Poor's 500 index, according to Thomson Reuters Starmine estimates.
As a further reason keeping buyers away from Europe, Morris flagged concerns about struggling Greece, which has yet to secure the second tranche of its bailout package.
A meeting of euro zone finance ministers was set to discuss aid to Greece on Tuesday and traders said any sign of disagreement at that meeting could send European markets into reverse.
"Current optimism could not only be short-lived but attention could swiftly shift from the U.S. to Greece," a London-based trader said.
Charts on the euro zone Euro STOXX 50 index, up 1.5 percent to 2,462 points, pointed to a still-negative outlook to the end of the year after the index broke below its October 11 and November 9 bottoms last week, showing the selling pressure was piling up.
"I think the market is going to consolidate the up move between June and September," Ouri Mimran, a technical strategist at Natixis in Paris, said.
Mimran said the Euro STOXX 50 could fall back to 2,394 points and 2,263 points by the end of the year, corresponding to the 38.2 percent and 61.8 percent retracements of the June-September 27 percent rally.