European equities rally as China avoids meltdown

London (AFP) - European stock markets pushed sharply higher on Monday, building on Asian gains after Shanghai avoided a sharp selloff on its return from holidays and banks were buoyed by HSBC's decision to stay in London.

London closed 2 percent higher, with Frankfurt and Paris up around 3 percent.

The mood on markets brightened as Japanese investors shrugged off an economic contraction to propel Tokyo stocks more than seven percent Monday, leading an Asia recovery after last week's horror show.

Shanghai fell 0.6 percent -- but losses were modest considering traders were playing catch-up with last week's bloodbath across world stock markets.

"No severe sell-off in Chinese markets, after a week's holiday, has allowed London-listed financial stocks to break out of the doghouse and lead the FTSE higher, buoyed by HSBC's decision to stay in the City," CMC Markets analyst Jasper Lawler told AFP.

Markets had jumped higher on Friday, ending a brutal week on a positive note following solid US and German economic data and an increase in oil prices.

Trading in the European afternoon session was dominated by comments by European Central Bank chief Mario Draghi as US markets were closed for the Presidents Day holiday.

Draghi said the ECB "will not hesitate to act" if needed to stimulate the economy and push up inflation in the eurozone at its next monetary policy meeting in March.

While that helped European equities maintain their gains, the euro seemed to take Draghi?s words as a statement of intent, the currency tumbling just shy of 1 percent against the dollar" said Spreadex analyst Connor Campbell.

- HSBC to stay -

Asia-focused banking titan HSBC saw its share price rise 1.4 percent to 446.40 pence in London on Monday, as investors welcomed news it would keep its headquarters in the British capital.

The lender's Hong Kong-listed stock meanwhile rallied more than four percent.

The news also lifted other banking stocks in London, with Lloyds Banking Group up 2.3 percent and Royal Bank of Scotland adding 2.6 percent.

"HSBC's decision to keep its headquarters in London is a fillip for the City and the Treasury," said Russ Mould, investment director at trading firm AJ Bell.

"The government will be relieved that HSBC's board decided unanimously to stay in the UK."

Asian markets enjoyed a broadly healthy start to the week, but another poor trade report reinforced fears over China's outlook.

Experts warned the gains were unlikely to be sustained for a long period, with the concerns that have wiped trillions off markets already this year -- including the weak global economy and China's slowdown -- still unresolved.

Tokyo soared 7.2 percent by the close after losses of more than 11 percent last week that were fuelled by a surging yen as dealers fled into safe-haven investments.

- 'Bad news is good news' -

News that the Japanese economy shrank in the final quarter of last year -- while dealing another blow to Prime Minister Shinzo Abe's attempts to kickstart growth -- fanned calls for the nation's central bank to further ease monetary policy.

Mike van Dulken, analyst at Accendo Markets, said sentiment was buoyed on Monday by "hopes that the recent banks-led global market rout was overdone and more stimulus was primed after poor Chinese trade data and Japanese GDP and industrial production".

"Bad news is good news, again," he added.

Chinese investors digested data showing exports tumbled 11.2 percent year-on-year in dollar terms and imports plunged 18.8 percent.

That fuelled hopes the People's Bank of China will step in to provide relief, having slashed interest rates six times in the 12 months to November and also lowering the amount of cash lenders must keep in reserve.

Elsewhere in Asia, Hong Kong stocks surged 3.3 percent, Sydney gained 1.6 percent and Singapore piled on 2.7 percent.

- Key figures around 1630 GMT -

London - FTSE 100: UP 2.0 percent at 5,824.28 points (close)

Frankfurt - DAX 30: UP 2.7 percent at 9,206.84 (close)

Paris - CAC 40: UP 3.1 percent at 4,115.25 (close)

Milan - FTSE MIB: UP 3.2 percent at 17,042 (close)

EURO STOXX 50: UP 2.9 percent at 2,837.30

Tokyo - Nikkei 225: UP 7.2 percent at 16,022.58 (close)

Shanghai - composite: DOWN 0.6 percent at 2,746.20 (close)

Hong Kong - Hang Seng: UP 3.3 percent at 18,918.14 (close)

New York - Dow: UP 2.0 percent at 15,973.84 (Friday close)

Euro/dollar: DOWN at $1.1146 from $1.1250 on Friday

Dollar/yen: UP at 114.60 yen from 113.25 yen