March 14 (Reuters) - European shares on Tuesday posted their biggest single-day gain in nearly three months, helped by a resilient outlook for the region's banking sector in the face of Silicon Valley Bank's (SVB) collapse and growing optimism over a slowdown in the Federal Reserve's rate-hiking cycle.
The pan-European STOXX 600 index (.STOXX) closed 1.5% higher amid a broad-based rally, rebounding from its worst three-day selloff of 3.9% this year.
European banks (.SX7P) rebounded 2.5% after recording their worst single-day sell-off in over a year on Monday, as U.S. regulators' moves to guarantee SVB's deposits failed to reassure investors.
The index also notched its worst two-day selloff of 9.4% on Monday since the Russia-Ukraine war broke out early last year.
"The selloff (in banks) was well and truly overdone," said Gerry Fowler, head of European equity strategy at UBS.
"The market realizes that there may well have been a path of sentiment contagion, but the resilience of the European banking sector is greater than people thought and the squeezing out of positions is perhaps reversing somewhat today."
Further, Chancellor Olaf Scholz believes that Germans should not have major concerns about the SVB fallout and that regulators had learned lessons from the global financial crisis in 2008.
On the data front, U.S. consumer prices rose in line with expectations and bolstered bets of a smaller rate hike by the Fed next week, boosting Wall Street's main indexes on Tuesday.
Investors are also keenly awaiting the European Central Bank's interest rate hike decision on Thursday, which is expected to be a 50-basis point.
Meanwhile, Deutsche Bank sees a higher likelihood of the ECB raising its key rate by 25 basis points, in light of the SVB collapse.
Industrial goods (.SXNP) spearheaded the gains among European sector indexes, boosted by a 7% jump in Rolls-Royce and 3.3% rise in Britain's biggest defence company BAE Systems (BAES.L) on plans to build the vessels for nuclear-powered attack submarines for Australia.
German arms maker Rheinmetall (RHMG.DE), Italy's Leonardo (LDOF.MI), France's Thales (TCFP.PA) and Sweden's SAAB (SAABb.ST) also advanced between 3% and 4.6%.
Among others, Casino (CASP.PA) soared 7.3% after the French supermarket retailer launched a sale of shares in Brazilian supermarket chain Assai (ASAI3.SA) to cut debt.
Italy's Assicurazioni Generali (GASI.MI) gained 3.6% after the insurer surprised investors by hiking its dividend payout.
Meanwhile, Close Brothers (CBRO.L) dropped 6% to the bottom of the STOXX 600 as higher Novitas provision weighed on its profit.
Credit Suisse (CSGN.S) slipped 0.8% after the embattled Swiss lender said customer "outflows stabilized to much lower levels but had not yet reversed" in its 2022 annual report.
