Italian auction, Fed send Europe stocks higher

LONDON (MarketWatch) � Financials led European stock markets higher on Wednesday after a broadly positive stress-test result for U.S. banks and upbeat comments from the Federal Reserve, while borrowing costs fell at an Italian debt auction.

Click to Play Fed: U.S. banks can withstand severe downturn

The Fed clears the way for many of the nation's largest banks to raise dividends and buy back shares as it releases the results of its latest round of stress tests. Photo: Getty Images

The Stoxx Europe 600 index XX:SXXP �rose 0.3% to 270.27, adding to Tuesday�s gains when the index reached the highest level since late July.

�This rally is premature trading as investors think the U.S. will drag Europe out of misery in six months from now. The issue is still that southern Europe will not be drawn out of misery for the next two to three years, because they had to cut so much,� said Christian Tegllund Blaabjerg, chief economist at FIH Erhvervsbank. �Some of the austerity measures will be postponed because you can�t cost-cut your way back to prosperity.�

Posting one of the biggest gains in Europe, E.ON AG, DE:EOAN �rallied 7% after reporting its first loss ever, but saying that profit will rise in coming years.

Deutsche Bank AG DE:DBK �added 3.4% and Commerzbank AG DE:CBK �was 2.6% higher, helping lift the DAX 30 index DX:DAX 1.2% to 7,079.42.

The broader European markets trimmed gains across the board in afternoon trade after U.S. Federal Reserve Chairman Ben Bernanke said in a video-taped speech that the economic recovery has been �frustratingly slow�. Read about Bernanke's speech

However, stocks were also supported by Fed announcements as the central bank Tuesday kept its interest rates at record lows and acknowledged improvement in the economy, while giving few clues on further quantitative easing.

Separately, after the U.S. market closed, the Fed released its bank-stress test and said 15 of 19 banks have enough capital to withstand a crisis. Citigroup Inc. C �was among the banks that came up short.

/quotes/zigman/204677 BMPS 0.20, +0.0043, +2.19%

�This should serve as inspiration to Europe to take bad assets off the bank�s balance sheets like the U.S. did,� Blaabjerg said.

�Currently, European banks are trading at lower levels (than U.S. banks) because they still have bad assets on their balance sheets and down the line it would enhance the banks get rid of them. Credit supply is increasing in the U.S., but is, at the best, only stable Europe,� he added.

The U.S. stock markets opened higher on Wall Street, but drifted mostly lower in early trade, adding pressure on Europe. Specifically the U.K. market tracked the performance overseas, as it has greater exposure to the American economy than other European indexes, Richard Hunter said, head of British equities at Hargreaves Lansdown. Read about U.S. markets

�Wall Street had a strong day yesterday and in the absence of a positive catalyst today markets are pulling lower,� he said. �It has taken the wind out of the sails in the U.K.�

The FTSE 100 index UK:UKX �closed 0.2% lower at 5,945.43, after trading as high as 5,989.07 earlier in the day. Read about London markets

Vodafone Group PLC UK:VOD �weighed on the index and shed 2.4% as Exane BNP Paribas downgraded the stock to underperform from neutral.