European shares post biggest weekly gain in 12 powered by financials

By Twesha Dikshit and Ragini Mathur

(Reuters) -European shares posted their biggest weekly gain in twelve weeks on Friday, as banking stocks continued to drive the benchmark index upwards, while investors watched for signs of a potential Russia-Ukraine ceasefire.

The pan-European STOXX 600 index rose 0.2% on the day, taking its weekly gains to 2.2%.

The euro zone banking index rose 1.9% on Friday, making it the top performing sector year-to-date with a 56.8% gain.

Banking stocks have benefited from investors seeking shelter in domestically-focused equities due to uncertainty surrounding U.S. tariff policies, while analysts have also highlighted strong performance during the earnings season.

"Financials are once more the key differentiator, with strong results across the board, accounting for three quarters of the upside surprise," strategists at BofA Global Research said.

"Given financials' outsized share in index earnings, better-than-expected quarterly earnings for the sector has helped to lift consensus estimates for the market overall by 5% since mid-July."

Globally, investors monitored geopolitical developments after Bloomberg News reported that the United States and Russia are aiming to reach a deal to halt the war in Ukraine that would lock in Moscow's occupation of territory seized during its invasion.

Defence stocks fell 0.8% on the day, leaving annual gains at 51.4%, just below the banking sector.

Shares of German reinsurer Munich Re fell 7.2% and ranked among the top decliners on the benchmark index after it trimmed its fiscal-year outlook for insurance revenue.

Insurance stocks declined 1.6%, a day after hitting a record high.

Shareholders in Germany's Thyssenkrupp are set to vote on a spin-off of its defence division, sending its shares up 2.7%, with European spending on defence raising expectations for the company's value.

Of the 198 companies in the STOXX 600 that reported earnings through Tuesday, 53% exceeded analysts' estimates, according to data compiled by LSEG.

Global markets also tried to gauge the outlook for U.S. monetary policy. Rate cut expectations strengthened after President Donald Trump announced Stephen Miran's nomination to the Federal Reserve Board, likely bringing dovish policy views to the table.

Strong corporate results and increasing confidence in Fed rate cuts have helped European stocks rebound from the five-week lows reached last Friday.

Lotus Bakeries' shares added 10.9% after the Biscoff brand owner reported strong first-half results, its best daily performance in over a year.

German IT service provider Bechtle's shares jumped 11%, the strongest performer on the benchmark index, after the company confirmed its full-year guidance.

Novo Nordisk extended gains made the previous day after rival Eli Lilly's weight-loss pill's late-stage study showed that it lagged Novo's injectable obesity treatment Wegovy.

(Reporting by Twesha Dikshit, Medha Singh, Ragini Mathur and Johann M Cherian; Editing by Harikrishnan Nair and Sonia Cheema, Kirsten Donovan)