By Riva Gold 

Bank shares extended a rally Wednesday, helping send stock markets higher in Europe and Asia after a record close on Wall Street.

The Stoxx Europe 600 gained 0.6%, boosted by a rise in the banking sector. Markets in Asia advanced, while futures pointed to a flat opening for Wall Street, after rising financial shares sent to the Dow Jones Industrial Average to its 20th record close of the year.

Italian lenders continued to drive market focus after Sunday's referendum. The FTSE Italia All-Shares Banks index rose 4.5% after gaining nearly 9% in the previous session -- its best day in five months -- amid media reports that Italy was ready to take a controlling stake in Banca Monte dei Paschi di Siena.

Shares in the troubled lender climbed more than 9% on Wednesday as investors awaited details on the possible government bailout, while shares of UniCredit advanced nearly 8%.

Italian bank stocks had fallen sharply Monday after voters rejected a constitutional overhaul, crystallizing investors' expectations Monte dei Paschi was in line to be nationalized. The FTSE Italia All-Share Banks Index is still down nearly 42% so far this year.

Tom Clarke, a portfolio manager at William Blair, increased exposure to Italian assets, including financials, last Friday ahead of the referendum. "We like Italy and Italian banks from a fundamental basis," he said, adding "a lot of the bad news was priced in already, so we considered the risk had been fully reflected."

Bank shares elsewhere in Europe also rose Wednesday, with Credit Suisse Group up 7.5% after a strategy update where it pledged deeper cost cuts. The Stoxx Europe 600 Banks sector had already gained 4.4% on Tuesday, its best daily performance since June, while the Euro Stoxx Banks Index on Wednesday was on track for its highest close since March.

Global bank shares have risen in recent weeks amid optimism that a steeper yield curve -- a bigger difference between short- and long-term bond yields -- and higher U.S. interest rates would boost lenders' profits.

Hopes for deregulation under the new administration have also goosed lenders' shares on Wall Street. "One thing the Trump administration in the U.S. is likely to be is regulation friendly, and the past few years have been regulation unfriendly for financials in the U.S.," Mr. Clarke said.

Oil prices fell slightly however, keeping gains in check, with Brent crude last down 0.6% at $53.58 a barrel.

Earlier, bank stocks also rallied in Asia, sending major bourses higher. Japan's Nikkei Stock Average rose 0.7% as the yen weakened against the dollar, while the TOPIX index of banks rose 2.4%.

Hong Kong's Hang Seng added 0.6%, while Australian stocks advanced 0.9%, even as data showed its economy contracted for the first time since 2011.

In government bond markets, the yield on the 10-year Treasury note fell to 2.369% from 2.394% in the previous session, its second highest close of the year.

10-year German yields edged down to 0.342% from 0.368%, while Italian bond yields fell to 1.892% from 1.967% and Portuguese yields fell to 3.501% from 3.637% as investors looked ahead to Thursday's European Central Bank meeting.

Many expect the bank to signal an extension of its program of quantitative easing, but it is running out of room to keep buying bonds, with its balance sheet already at record highs.

"[ECB President Mario'] Draghi's got to get creative," said David Lafferty, chief strategist at Natixis Global Asset Management. "I don't see how he can run the risk of tapering [the bank's bond-purchase program] while bailouts for Monte dei Paschi are going on," he said.

The euro inched up 0.1% against the dollar to $1.0732, while the dollar was down 0.1% against the yen and up 0.4% against the British pound following weak U. K. industrial data.

Still, the euro is down nearly 3% against the dollar from a month ago, while the yen is down more than 8%.

"Everyone is getting bullish on the dollar," said Davis Hall, head of currencies and precious metals at Indosuez Wealth Management. "The arrival of Donald Trump accelerated the final throwing in of the towel on yen, euro, and sterling," he said.

He is advising clients to buy the euro if it falls to $1.05, with the market already heavily short the common currency and monetary policy in Europe unlikely to loosen significantly further. "The euro is cheap, but fundamentals for Europe are less negative -- it's purely political uncertainty," he said.

The weaker euro has helped lift shares of European exporters. Germany's DAX index advanced 1.5% on Wednesday as auto makers gained, after closing at its highest level in nearly a year.

Investors were also looking ahead to the Federal Reserve's December meeting, where the bank is widely expected to raise interest rates for the first time in a year and offer more clues for the path in 2017.

"We're still addicted to accommodative monetary policy, and anything that causes the Fed to be more aggressive than expected is really going to hit markets," said Mr. Lafferty.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

December 07, 2016 08:55 ET (13:55 GMT)

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