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Europe ends higher as banks rally ahead of stress tests; earnings weigh

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European stocks recovered to close in the black on Friday as investors worked their way through another raft of European earnings, ahead of stress tests for European banks due out after the market close.

Oil price falls in July

European Markets: FTSE, GDAXI, FCHI, IBEX

The pan-European STOXX 600 finished up 0.71 percent provisionally, as a rally in banking stocks and a recovery in the price of U.S. crude helped prop up sentiment.

The recovery in U.S. crude lifted both European and U.S. stocks in late European trade, with traders citing profit-taking as a reason for the rebound. On the month however, U.S. crude and Brent under-performed, down some 15 percent each, around Europe's close.

The U.K.'s FTSE 100 reversed losses to end up 0.05 percent, with gains capped after two London-listed stocks—Pearson and Essentra—fell to the bottom of the STOXX 600. Meanwhile, Germany's DAX jumped 0.61 percent and France's CAC popped 0.44 percent.

Being the last trading day of the month however, indexes showed some stark contrasts. On the month, the STOXX 600 jumped 3.64 percent; the FTSE 100 jumped 3.38 percent; the French CAC 40 popped 4.77 percent while the German DAX rose 6.79 percent.

Banks rally 2.15% despite mixed earnings

In Europe, investors waded through another set of earnings results on Friday. The banks were once again in focus, as Barclays reported a 21 percent drop in first-half group profit before tax as the costs of disposing its non-core business weighed on earnings. Statutory group profit before tax was £2.06 billion ($2.71 billion), down 21 percent from the same period a year ago. Barclays shares however rallied 5.5 percent.

Shares of Spain's BBVA popped 3.7 percent after it posted a 58 percent rise in second-quarter net profit from the previous quarter, beating analysts' estimates, but it was lower year-on-year. Rival lender Caixabank posted a 34 percent rise in profit quarter-over-quarter, also sending shares up 4.5 percent.

BMPS shares jump 6.3%

Europe's banks facing testing times: Barclays CEO

Another Spanish lender Banco Popular announced that it had replaced Chief Executive Francisco Gomez, and named Pedro Larena Landeta as the new CEO. The bank also reported a sharp drop in quarter-over-quarter profit but shares still closed over 2 percent up.

Elsewhere, Italian troubled lender Monte dei Paschi di Siena said on Thursday that it had received an alternative rescue proposal from UBS as it prepares to unveil its own rescue plan, according to Reuters. UBS declined to comment on the report. This comes as European banking authorities get set to unveil the results of a European Union-wide stress test.

BMPS shares jumped 6.3 percent on Friday, but on the month, sank 18.7 percent.

Earnings: Generali rallies, but Essentra tanks 22.6%

A number of other companies also reported results Friday: Steel giant ArcelorMittal posted core profit of $1.77 billion in the second quarter, beating analyst forecasts and sending shares to close 5.6 percent up.

Meanwhile, shares in energy firm EDF rallied 6.4 percent after the board approved plans for the Hinkley Point nuclear project in the U.K. and after the company confirmed its financial targets for 2016.

Also in France, airplane engine and defense equipment maker Safran reported an 11 percent rise in recurring operating profit in the first half of the year, compared to the same period last year. Shares sank over 5 percent.

In the insurance space, Generali posted a 10 percent year-on-year fall in first half net profit but beating market expectations, sending shares to close 7.2 percent up.

Among the other key earnings were Pearson, which saw shares tumble 9.1 percent after it reiterated its 2016 guidance and saw its first-half underlying sales fall 7 percent; and Essentra, which tumbled 22.6 percent, after the group reported a disappointing set of financial results.

Central banks in focus as stress tests loom

While the big movers and shakers in Friday's session were coming mostly from corporates that have reported earnings, investors are also gearing up for news out of the European Central Bank and European Banking Authority, who are expected to release the latest set of results from its stress tests, due out after the close.

The main aim of the "stress tests" are to see how resilient the banks in Europe are, especially with the latest Brexit result taking a toll of the continent's lenders. More than 50 banks are expecting results, with the majority believed to meet approval.

"There is currently a great deal of attention on Brexit as well as the Italian banking crisis, so the ECB will be hoping that the stress tests reveal that the banks are in a position to cope with adverse trading conditions, " Nitin Rakesh, CEO and president of Syntel, told CNBC.

On the data front, euro zone gross domestic product (GDP) rose 0.3 percent quarter-on-quarter (compared to a 0.6 percent expansion seen in 2016's first quarter), while unemployment remained unchanged at 10.1 percent in June. Inflation in July also increased slightly, coming in at 0.2 percent year-on-year, according to Eurostat.

Elsewhere, the euro spiked against the U.S. dollar during Europe's afternoon trade. This comes as data from the U.S. showed that its economy had grown far less than expected in the second quarter, with GDP increasing at an annual rate of 1.2 percent, below market expectations. Consequently, the data plus earnings saw U.S. markets traded mostly mixed on Friday.

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