European stock markets rallied on Tuesday, after a successful Spanish debt auction fueled confidence, sending yields on peripheral euro-zone government bonds sharply lower.
Additionally, weak economic data from the region raised expectations that the European Central Bank may cut interest rates, further boosting market sentiment.
The Stoxx Europe 600 index XX:SXXP +2.43% jumped 2.4% to close at 292.63, marking the biggest one-day percentage gain since August last year.
Click to Play
Apple faces identity crisis
After grappling with a stock plunge, Apple must prove that it is not just a hardware business but a software one too.
The solid move helped the index mostly recover from a 2.5% decline seen last week, when the benchmark posted its worst weekly performance since November 2012 after signals of slowing growth in China.
In Tuesday's trade, strong earnings reports helped lift shares. Shares of ARM Holdings PLC UK:ARM +11.85% ARMH +12.85% rallied 12%, after the chip maker posted a better-than-expected 28% rise in first-quarter revenue, boosted by strong demand for its microchip designs.
Shares of Compagnie Financiere Richemont SA CH:CFR +8.29% gained 8.3%. The luxury watchmaker and jewelry company said it expects net profit to rise 30% in 2013, boosted by favorable exchange rates.
For the broader European markets, stocks started to move firmly higher in midmorning trade after Spain's government reportedly sold 3.011 billion euros ($3.93 billion) in Treasury bills at sharply lower funding costs than at previous auctions. In the secondary market, the yield on 10-year Spanish government bonds ES:10YR_ESP -0.0009% dropped 22 basis points to 4.27%, touching the lowest level since November 2010, according to electronic trading platform Tradeweb.
Spain's IBEX 35 index XX:IBEX +3.26% jumped 3.3% to 8,289.30.
In Italy, the 10-year government yield IT:10YR_ITA -0.0011% dropped below 4% for the first time since November 2010, falling 14 basis points to 3.94%. The FTSE MIB index XX:FTSEMIB +2.93% gained 2.9% to 16,490.77.
MARKETS | Expanded markets coverage
• The Tell: Market news and analysis
• U.S. and Canada markets | Canada section
• Columns: Stocks | Oil | Gold | Bonds | Dollar
TOOLS AND DATA | Markets data menu
• My Portfolio: Know where your funds are?
• Real-time currency exchange rates
• After-hours stock screener
"The message in this is that Italian and Spanish bonds have become investible again, which they weren't last year," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.
"Spain and Italy bonds are very liquid and if you can buy 10-year Italian paper at a 4% yield as opposed to French debt at 1.7%, and you believe the ECB will hold the fort, these are perceived as attractive investments. There has been a shift in market psychology—investors have gone from perceiving Italy and Spain as high risks to high yields," he added. But with political instability in Italy and worries over the banking sector in Spain, the fundamentals haven't changed, Spiro said.
"Investors expect the rally to continue, because central banks are effectively propping up the bond markets with cheap liquidity," he said.
"There's a dangerous disconnect between market sentiment and the country fundamentals. The greater the disconnect the more scope there is for the market to correct in a disorderly manner."