Europe rallies, shrugging off oil and ruble losses

European shares surged to close sharply higher on Tuesday reversing earlier losses seen after the fall in the price of oil and Russia's market and foreign exchange rout.

Oil relief


The pan-European Euro Stoxx 600 Index closed around 1.7 percent higher with the French CAC, London's FTSE 100 and and the German DAX all unofficially ending over 2 percent higher.

Oil has become a leading indicator for many investors in recent sessions and curbed risk sentiment again in early Tuesday trade. Brent futures fell below $60 a barrel Tuesday morning for the first time since July 2009 but energy stocks rallied after U.S. crude recovered some of its earlier losses.

After falling to lows not seen since the spring of 2009, crude futures for January delivery on Tuesday fell to a low of $53.60 a barrel, and were lately up $1.01, or 2 percent, to $56.92 a barrel.

Shares in oil major surged, with Tullow Oil up over 6 percent and Royal Dutch Shell climbing over 5 percent.

But the Russian ruble, which hit fresh lows again on Tuesday dented European banks like Austria's Raiffeisen Bank, one of the largest lenders in the region, which fell over 7.5 percent.

Positive data from the German analyst and investor sentiment ZEW survey and a fund manager survey from Bank of America Merrill Lynch helped buoy sentiment.

Business activity in the euro zone grew more than expected in December, although the rate of expansion remained weak. Euro zone December flash composite purchasing manager's index (PMI) data from Markit - a closely-watched indicator of economic growth - came in at 51.7, just above analyst forecasts of 51.5 and November's final reading of 51.1. A reading above 50 indicates growth in the sector.

In Germany, the widely-watched ZEW Institute's economic sentiment index for December was released with the number shooting up to 34.9 points, from 11.5 in November and above analyst expectations of 20.

Read MoreCrude collapse prompts great rotation into cash

Cash now makes up 5 percent of fund manager portfolios on average, according to fund managers polled by the Bank of America Merrill Lynch. Almost a third of those surveyed have hiked their cash positions and are now overweight relative to their benchmarks, as they close out commodity positions. Meanwhile, investors have bolstered their positions in European equities.

Russia's ruble in trouble

Russia's central bank sharply raised its key interest rate from 10.5 percent to 17 percent in an emergency move to halt a collapse in the ruble. On Monday, the Russian currency saw its biggest drop against the dollar since 1998. Russia is sliding towards recession amid falling oil prices – on which it relies for much of its economic growth – and Western sanctions incurred after its alleged incursions into Ukraine.

Later Tuesday, an official at Russian central bank said it would take further action to stabilize the country's markets after the rate rise.

Read MoreEuro zone business activity posts weak growth

U.S. stocks rose on Tuesday as the price of oil reversed higher and as investors considered global concerns against generally healthy indicators on the U.S. economy.

Banking stress tests

In the U.K., banks were in the spotlight following the results of stress tests by the Bank of England. The Co-operative Bank was the only bank to fail the tests, although Royal Bank of Scotland (RBS) and Lloyds Banking Group were also warned that their capital position at the end of 2013 were inadequate.

Barclays, HSBC, Nationwide, Santander UK and Standard Chartered all passed the stress tests comfortably. Shares of the heavily-weighted Barclays rose around 2.2 percent.

In corporate news, U.K. telecoms giant BT announced on Monday that it had entered into exclusive talks with Deutsche Telekom and Orange to acquire their mobile business EE. BT shares climbed almost 2 percent, while Orange shares rose 3.7 percent.

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