European shares climb as banks, defence stocks lead broad-based rally

European shares climbed over 1% with gains broadening across sectors, while banks advanced as dealmaking involving Credit Agricole and Banco BPM and ⁠strong results from Italy's UniCredit lifted the sector.

The pan-European STOXX 600 ⁠closed 1.26% higher at 656.52 points, with the ​defence sector leading sectors higher with a 4.2% rise.

The Euro STOXX banking index soared 3.1%.

Banco BPM jumped 10.7% after Credit Agricole SA said it had proposed that its Italian subsidiary merge with the Italian lender to create a combined entity that ​would become the country's ‌third-largest bank. The French bank's shares inched lower.

UniCredit gained 6.3% after posting a much larger-than-forecast 24% annual rise in third-quarter earnings and hiking its full-year profit goal, as it prepares to shape strategy at Commerzbank. The German lender was up 3.9%.

"European banks have benefited in the early quarters of this year from the AI expansion. The AI productivity gains have ​been quite strong, but the financing also helped keep the bank earnings quite strongly along with higher trading revenues," said Ipek ‌Ozkardeskaya, a senior market analyst at Swissquote Bank.

Rate expectations will come into focus later this week with October inflation data and third-quarter euro zone growth figures.

Investors see the European ‌Central Bank hiking interest rates by at least 25 basis points in January next year, LSEG-compiled data showed. Markets were also awaiting details on who could replace Christine Lagarde as the next president of the central bank.

Aiding risk sentiment further, Brent ​crude fell 4.4% after US President Donald Trump downplayed the likelihood of new strikes on Iran as long as talks to end the conflict progressed.