Europe Shares Close Higher on US Rally, Optimism

European shares closed higher on Thursday, extending the two-week rally that has propelled indexes to multi-year highs, as a string of upbeat U.S. data fueled hopes of an improvement in the global economic outlook.

Shares in European telecom equipment makers rallied, with Ericsson closing up 2.4 percent and Alcatel-Lucent up 2.6 percent, after the world's largest mobile carrier China Mobile said it plans to spend $6.7 billion to develop 4G technology this year.

The pan-European FTSEurofirst 300 Index of blue chip European shares closed up 1.1 percent, surpassing an intraday high of 1,197.73 points reached last Friday, a level not seen since September 2008.

The broader STOXX Europe 600 was up 0.74 percent, hitting a near five-year high, while Germany's DAX was up 1.01 percent, reaching a level not seen since January 2008.

London's FTSE closed at 6529, led by Aggreko, which traded 6.85 percent higher after striking a deal to supply power in Mozambique and Namibia.

"We're bullish, as more and more investors are, and we're seeing people getting rid of their derivative hedges, which explains the drop in volatility indexes," said David Thebault, head of quantitative sales trading at Global Equities.

"The only worry is that we're seeing improving macro data from the United States, but not yet in Europe, which means the market is rising on hopes and not real signs, and the risk is that the rally won't be immune to disappointment from the macro side."

Investors were keeping a close eye on a two-day European Union summit starting on Thursday, which is expected to focus on how to address high unemployment and the need to ease austerity measures to revive economic growth.

"The market is expecting a change in tone about the austerity drive. The leaders should be realizing now that they need to loosen it otherwise the economy won't turn the corner," Global Equities's Thebault said.

The euro zone's Euro STOXX 50 Index finished up 1.5 percent at 2,744 points. The blue chip index, which has been hammered by Europe's three-year sovereign debt crisis, still needs to rise about 13 percent before reaching its 2008 levels.

The Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely used measure of investor risk aversion, was down 10.9 percent on Thursday, signaling a sharp rise in equity investor optimism.

"It's a massive drop, and investors are indeed lowering their portfolio protection, but the expiry of options and futures contracts tomorrow is also mechanically fueling the drop," a Paris-based derivatives trader said.

Highest Buying Interest Since 2009

According to Societe Generale strategists, hedge funds have been increasing their short positions on volatility and long positions on equities, betting that central banks will continue to provide abundant liquidity to support the economic recovery.

"The Fed has strongly reiterated its intention to continue QE (quantitative easing) for now, and hedge funds have paid close attention," the strategists wrote in a note, saying the level of net buying interest on the S&P 500 is at its highest since June 2009.

Euro zone banking stocks - which still have the lowest price-to-book ratios among the region's blue chips despite their strong rally since last July - featured among the top gainers on Thursday, with France's BNP Paribas up 1.6 percent and Spain's Banco Santander up 2 percent.

However, shares in Italian banks fell on Thursday after the Bank of Italy announced that Italy's banks should cut bonuses and keep dividends within 50 percent of net profit. Banks that have not achieved the requisite core tier 1 capital ratio should not pay a dividend at all, it said.

After the announcement, shares in UBI Banca fell 1.47 percent, Banca Pop Milano fell 2.7 percent but shares of Intesa Sanpaolo rose 1.7 percent. The FTSE MIB pared gains before rallying once more, finishing up 2.45 percent higher.

Meanwhile, Italian insurer Generali surged 9.35 percent after reporting forecast-beating operating results. Telecom shares also featured among the biggest gainers on Thursday, with France Telecom adding 6.6 percent, boosted by an upbeat note from Morgan Stanley analysts.

In other stocks news, Volkswagen, Europe's biggest carmaker, said it would step up production in emerging markets like China to offset deteriorating demand closer to home. Volkswagen shares traded 2.44 percent lower on Thursday afternoon, pushing the European auto sector into the red.

Morrisons reported a full-year dip in profits, its first decrease for six years. However, shares in the U.K. supermarket chain climbed 3.83 percent after it announced it was in talks with Ocado Group to deliver online groceries by 2014.

Germany's Lufthansa released a trading outlook for the year on Thursday. The airline said it expected operating profit to rise after increased cost cutting; shares climbed 2.39 percent.

Home Retail Group, which owns Homebase and Argos stores in the U.K., surged 15 percent as the retailer raised its full-year profit estimate as sales beat expectations.

European leaders gathered in Brussels on Thursday for a two-day EU Summit to discuss the continent's austerity measures and rising youth unemployment.

"In line with recent damp squibs in Brussels, however, there seems little to get excited about with this rendez-vous," Emily Nicol, an economist at Daiwa Capital said in a morning note.

"Nevertheless, with the euro area economy having contracted in each of the past five quarters and Draghi acknowledging last week at the Governing Council meeting that the ECB (European Central Bank) expects euro area GDP (gross domestic product) to contract by a further 0.5 percent this year, and with countries' fiscal policy plans set to be reviewed, this summit provides an opportunity for policymakers to give permission to struggling countries to go a little easier on the austerity."

In Asia, Japan's Nikkei snapped a two-day losing streak on Thursday, supported by expectations for aggressive monetary easing, though other Asian markets ignored strong retail sales data from the U.S. to extend their losses.