By Sruthi Shankar and Susan Mathew

(Reuters) – A strong rally in mining stocks on Monday boosted an index of European equities, which retraced all losses logged early in the session on worries about inflation and the upcoming earnings season.

Europe’s mining sector surged 3% to post its biggest daily gain in three months as iron ore and coking coal rallied on supply fears, while base metals prices jumped on concerns about rising cost of energy and raw materials. [IRONORE/] [MET/L]

As a global energy crunch lifted crude prices, oil stocks rose more than 1%, as did auto shares, offsetting losses in travel & leisure, utility and retail names. [O/R]

The pan-European STOXX 600 index recouped losses of as much as 0.6% on the day, to end marginally higher. A heavy presence of commodity-related companies saw London’s FTSE 100 outperform with a 0.7% rise.

“Inflation is set to stay higher for longer than we previously envisaged due to surging energy prices and goods shortages. The boost from energy will go into reverse next year due to base effects and lower oil and gas prices,” said the global economics team at Capital Economics.

“Goods shortages are worsening and will persist for some time… These pressures should start to ease next year. But there is a risk that the shortages trigger a more persistent pick-up in price pressures.”

With third-quarter earnings set to kick off this week, investors worry about rising energy costs eating into company earnings. Profit growth is estimated to be up 29.6% for U.S. companies and 45.6% for European firms, according to Refinitiv IBES data.

The banking index touched its highest since February 2020, recovering almost all pandemic-induced losses as investors jacked up interest rate expectations. Money markets are pricing in a 10 basis-point rate hike from the European Central Bank by the end of next year.

British banks HSBC, Lloyds Banking Group and Natwest Group all rose more than 2% after hawkish comments from Bank of England officials drove more bets on a November interest rate increase.

Graphic: European banks recover almost all pandemic-related losses https://fingfx.thomsonreuters.com/gfx/mkt/akvezazkopr/European%20banks.png

Among stocks, British online fashion retailer ASOS tumbled 13.4% after it warned higher logistics costs and supply chain disruption could force 2022 profits down more than 40%, and said Chief Executive Nick Beighton will step down.

German real estate investor Adler Group slipped 2.5% after it agreed to sell residential and commercial property worth 1.49 billion euros ($1.73 billion) to rival LEG Immobilien.

(Reporting by Sruthi Shankar and Anisha Sircar in Bengaluru; Editing by Sriraj Kalluvila and David Gregorio)