Data Buoy European Shares Ahead of Stress-Test Results

Still, there was a degree of trepidation ahead of the European bank stress tests, as the debate continues to rage whether the results will be of any benefit to financial markets.

The Stoxx Europe 600 Index was up 0.4% at 255.37. Frankfurt's DAX rose 0.6% to 6177.87, and Paris's CAC-40 was 0.5% higher at 3617.49.

Friday's advance was spurred by Germany's Ifo data, which showed the business-sentiment index leaping to 106.2 this month from 101.8 in June, the largest gain in July since the country's unification. The index was expected to fall to 101.5.

"Combined with the strong [purchasing managers indexes] yesterday, the data suggests the strong momentum observed in the second quarter will probably continue in the third quarter," said Luigi Speranza, an economist at BNP Paribas.

The Ifo data pushed the euro firmly back over $1.2900, and the single currency was recently trading at $1.2937 against the dollar, up from $1.2892 in late New York trade Thursday.

In the U.K., however, London's FTSE 100 was off 0.2% at 5306.81, with banking stocks leading the declines following Thursday's surge in the indexes' financial sector. Shares of Lloyds were down 1.2% and HSBC fell 1.3%. Standard Chartered lost 2.1% after UBS downgraded the stock to "neutral" from "buy."

The results of the European Union-wide stress tests on banks has also curbed much of the enthusiasm in the market, with investors waiting for the release of the figures at 5 p.m. in London (12 p.m. ET) before committing further cash into the sector. The pan-European Stoxx Europe 600 banks index eased 0.2% to 210.76.

There is certainly the risk for some disappointment or negative reaction to the results, said Joel Kruger, a currency strategist at Daily FX. "Many analysts are concerned that the standards of the tests will be too lax and thereby discredit the tests, which ultimately could once again weigh on the euro," he said.

And whether the tests produce the cathartic effect that was seen last year in the U.S. remains to be seen, said Gavan Nolan, a credit analyst with Markit, noting that for an exercise in transparency, the process has been remarkably opaque. Still, "bank spreads have been tightening in recent weeks amid tentative optimism that the tests will ease concerns about balance sheet weakness, at least for the near time being," he added.

Also, the general market sentiment has already improved given the flow of relatively solid economic numbers out of the euro zone and the U.S. on Thursday and Friday, along with the continued string of strong second-quarter earnings results, boosting hopes for a global recovery.

In the U.K., the economy grew at its fastest pace in more than four years in the second quarter. Growth amounted to 1.1% on a quarterly basis, up from 0.3% in the first quarter and a far cry from the 0.6% increase that had been forecast.

In Asia, strong U.S. earnings and the higher close on Wall Street drove Asian stock markets higher. Japan's Nikkei Stock Average gained 2.3% after a five-session losing streak and South Korea's Kospi Composite was up 1.3%. Hong Kong's Hang Seng rose 1.1% and the Shanghai Composite rose 0.4%, finishing off lows.

In commodities, spot gold was at $1198.30 per troy ounce, up around $3 from late New York trade Thursday, while the benchmark Nymex September crude oil futures contract was down just 21 cents at $79.09 per barrel.

The strong economic numbers, however, hit the core sovereign-debt markets, as investors felt confident enough to leave these safe havens. The strong German Ifo resulted in the September bund contract dropping to 128.26, down 0.43 from 128.83 before the release, while the U.K. GDP number pushed the September gilt contract down 0.77 to 120.39 from around 121.00.

By ISHAQ SIDDIQI and ANDREA TRYPHONIDES