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Bloomberg

European stocks extended a two-month high on speculation the European Central Bank will step up stimulus and amid mergers-and-acquisitions activity.

The Stoxx Europe 600 Index added 0.4 percent to 346.6 at 2:15 p.m. in London, with the gauge’s lenders contributing the most to the advance. The benchmark index gained 2.9 percent last week as Mario Draghi said the ECB needs to accelerate inflation and may broaden its asset-purchase program, while China cut key interest rates for the first time since 2012.

“Banks are outperforming on the prospect of economic stimulus measures,” said Guillermo Hernandez Sampere, who helps manage about 130 million euros ($161 million) at MPPM EK in Eppstein, Germany. “This is a good sign for their earnings, which suffered in the low interest rate environment.”

Banks in the Stoxx 600 rose 1.3 percent as a group. Banco Santander SA added 3.1 percent and Societe Generale SA gained 3 percent. Spain’s IBEX 35 Index climbed 1.5 percent for the biggest increase among 18 western-European markets.

As stocks advanced, the yield on 10-year Spanish government bonds fell below 2 percent for the first time on speculation the ECB will buy sovereign debt.

“The status quo is to invest with the belief that stimulus will continue to be supportive to equity prices,” Daniel Weston, a portfolio manager at Aimed Capital GmbH in Munich, wrote in an e-mail. “All corners of the world are stimulating. Investors are being forced to consider separating weak fundamentals with bullish stimulus.”

German Data

Stocks extended gains after a report showed German business confidence rose in November for the first time in seven months. The Ifo institute’s business climate index, based on a survey of 7,000 executives, climbed to 104.7 from 103.2 in October. Economists had forecast a drop to 103. The DAX Index increased 0.8 percent, heading for its highest close since July.

Some shares moved on M&A activity. Smith & Nephew Plc rose 4.5 percent after people familiar with the situation said Stryker Corp. is examining a bid for the U.K. medical-device manufacturer. BT Group Plc climbed 3.7 percent after the biggest U.K. broadband provider said it’s in early talks with two mobile companies about an acquisition.

Friends Life Group Ltd. rallied 4.3 percent after Aviva Plc said it’s in talks to buy the company. Aviva, Britain’s second- biggest insurer, declined 5.5 percent.

Automakers added 1.7 percent as a group. Peugeot SA gained 4.2 percent and Bayerische Motoren Werke AG rose 1.7 percent.

Stock Upgrades

Among other stocks that moved, London Stock Exchange Group Plc advanced 3.1 percent and Deutsche Boerse AG gained 1.9 percent after Citigroup Inc. recommended buying shares of the bourse operators. Raiffeisen Bank International AG rose 2.2 percent after ING Groep NV raised its stock rating to buy from hold, and Metro AG increased 4.4 percent after a Macquarie Group Ltd. upgrade.

Petrofac Ltd. tumbled 25 percent after saying annual profit will be on the low end of its forecast range. FirstGroup Plc slumped 10 percent after report that the U.K. rail and bus operator will miss out on the London-Scotland East Coast Main Line train contract likely to be awarded this week.

The Stoxx 600 climbed 11.4 percent from its low in October through the end of last week, sending its valuation to the highest level since December 2009. The gauge traded at 15.8 times estimated profit, data compiled by Bloomberg show.