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Europe shares rally on limited Fed stimulus cut

European equities closed higher on Thursday as investors around the world reacted to the U.S. Federal Reserve's decision to maintain low rates while winding down its stimulus program.


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Price
 
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FTSE
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DAX
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CAC 40
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IBEX 35
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Stocks bounce

The pan-European FTSEurofirst 300 provisionally closed up 1.6 percent at 1,279.76 points, its highest point since early December. The index is up roughly 13 percent so far this year.

All sectors posted gains and all major European indexes pushed higher. The Spanish IBEX 35 closed higher by roughly 3.1 percent, the German DAX closed up around 1.5 percent and the French CAC 40 was higher by 1.5 percent. European benchmark indexes clawed back losses registered earlier this month as investors looked towards a "Santa rally" traditionally seen in December.

The U.S. central bank's monetary policy committee decided on Wednesday to start winding down its bond buying program but said it would do so gradually, trimming its monthly asset purchases by $10 billion to $75 billion from January onwards.

It sought to temper the market impact of the policy move by saying its key interest rate would stay near zero "well past the time" unemployment falls below 6.5 percent.

U.S. stocks fell on Thursday, with Wall Street retreating after the prior session's Fed-inspired surge, after existing home sales fell 4.3 percent in November and new claims for jobless benefits climbed last week to a near nine-month high. Ahead of the open, the Labor Department reported initial claims for state unemployment benefits increased 10,000 to 379,000.

But although some were surprised by the Fed's move, Jean-Claude Trichet, former head of the European Central Bank, told CNBC the decision should have been expected by markets, investors and savers in the U.S., and abroad.

"One cannot expect such extraordinary measures -- such very unconventional measures -- to be continued eternally," he said. "It was very well prepared and pre-announced. And I must say, on a personal basis, I am happy that it was announced by Ben (Bernanke)… yesterday."

Banking union eyed

In other U.S. news, the Senate passed a two-year budget deal on Wednesday to ease automatic spending cuts and reduce the risk of a government shutdown, shifting the focus to a spending measure that Congress must pass by January 15.

Meanwhile in Europe, the region's leaders are inching closer to agreeing on a banking union to reshape its banking system and deal with failing lenders. European leaders are meeting at a summit on Thursday and Friday and want to sign off on a deal so the banking union can start in 2015.

Saab shares soar

In stocks news, shares of Bayer closed higher by around 1.1 percent after the German pharmaceutical moved closer to taking over Algeta's Norwegian partner in a $2.9 billion deal.

Saab confirmed Thursday that it had won a deal to provide fighter jets to Brazil; shares closed higher by around 32 percent.

Shares of AstraZeneca climbed 1.1 percent after it announced it was buying two diabetes ventures for a combined $4.1 billion.

(Read More: AstraZeneca soars on Bristol-Myers diabetes deal)

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