Europe close: Stocks extend rally as bond yields and US dollar slip

European stocks continued to rally with a softer dollar and lower longer-term government bond yields propping up investor sentiment.

Yet some analysts in the City expressed a degree of caution.

"Markets have continued their upbeat tone despite continued warning signs over the economic difficulties ahead," said IG senior market analyst Josh Mahony.

"Unfortunately, there is a strong chance that we will soon see that stubbornly high inflation could result in rates remaining elevated for longer than desired. Nonetheless, with yields drifting lower and the dollar on the back foot, we are seeing risk assets gain traction once again today."

The pan-European Stoxx 600 index put on 1.44% to 407.64, the Dax was up by 0.94% to 13,052.96 and the Cac-40 gained 1.94% to 6,250.55.

In the UK, the FTSE 250 flew higher even as new UK prime minister Rishi Sunak's thinly-veiled warning of spending cuts, as investors piled in on the back of calmer waters in the Gilt market.

Notably, cable sprang higher alongside, rising by 1.72% to 1.1472, while euro/dollar added 0.90% to 0.9963.

After losing the leadership race to Liz Truss two months ago after the resignation of the disgraced Boris Johnson, 42-year-old former finance minister Sunak was officially invited to form a government by King Charles.

Yields on Italian benchmark 10-year government debt meanwhile gave back 23 basis points to 4.361%.

The IFO Institute's business confidence index dipped from a reading of 84.4 for September to 84.3 in October (consensus: 83.3).

Nevertheless, according to Melanie Debono at Pantheon Macroeconomics: "All told, today's release was better than expected but still not enough to convince us that the German economy will escape recession this quarter.

"After falling by 0.3% quarter-on-quarter in Q3—data due on Friday—we think German GDP will fall by 0.5% in Q4."

In equity news, HSBC shares fell 5% as the bank reported a fall in third quarter earnings. Rival UBS gained after reporting a double-digit profit declines. Both institutions beat market expectations.

SAP gained 6.5% despite earnings falling short of forecasts, while Softcat was up after posting higher earnings.

Online beauty products seller THG surged 18% after backing its full year outlook as third-quarter revenues rose and it signed a new banking facility.