European shares switched to risk-on mode on Thursday, joining an overnight rally on Wall Street and in Asia, with the banking sector posting the best performance amid expectations that the European Central Bank may soon start to wind down its stimulus.

The pan-European STOXX 600 index and Germany's DAX were both up 0.4 per cent at 0820 GMT, while France's CAC 40 rose 0.6 per cent. Britain's FTSE opened an hour late because of a delay in the opening auction and was trading up 0.2 per cent.

Concerns about an escalation in the trade dispute between the United States and its closest allies have faded before a G7 summit in Canada.

“Risk is very much back on again as markets put trade war fears well and truly to one side and focus on the fundamentals again”, said Neil Wilson, chief market analyst at Markets.com.

Euro holds near 2-week high

The banking sector index was up 1.4 per cent as the euro held near a two-week high and the yield on Germany's benchmark 10-year bond hit its own two-week high.

Banks typically benefit from higher bond yields, which are currently rising after ECB Chief Economist Peter Praet suggested on Wednesday the central bank may use next week's policy meeting to reveal more about the end of its bond-buying programme.

“The rise in yields helped push banking stocks higher in the process, including banks in Italy which have been pressured in recent weeks as a result of concern that the new populist Italian governments expansionary policies might put it into conflict with EU fiscal rules,” commented Michael Hewson, chief market analyst at CMC Markets.

Italian banks posted strong gains with Bper Banca and Banco BPM up 4.1 and 2.8 per cent, respectively.

Spanish banks, which had also suffered from political instability in the country, were also rising with Caixabank up 5 per cent and Bankia up 4.1 per cent.

“For now, markets in Europe appear to be settling down a bit after some significant volatility in the short term with both Spain and Italian markets showing signs of stabilizing, though Italy remains a bigger concern”, Hewson also said.

The tech sector was also firmly higher, up 0.6 per cent after the Nasdaq hit a fresh record and the sector posted big gains in Asia. Shares in Remy Cointreau posted one of the worst performances of the index, down 4.1 per cent, after publishing its annual results with traders citing disappointment over the company's dividend.

Danish drugmaker Lundbeck fell 1 per cent after it agreed to pay $52.6 million to resolve a US inquiry into its financial support of patient assistance charitable foundations.

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