European stocks close higher as investor nerves settle; banks up 4% and UBS soars 12%

European markets closed higher on Tuesday as investor nerves settled after UBS’ takeover of rival bank Credit Suisse. The pan-European Stoxx 600 index closed 1.3% higher, while most sectors closed in the green. Financial services led gains, up 4.4%, as the banking sector climbed 3.8%. Insurance stocks were up 2.9%. On Monday, European markets fluctuated, with the Stoxx 600 lower in the first hours of trade before moving into positive territory. UBS agreed on Sunday to buy rival Credit Suisse for 3 billion Swiss francs ($3.2 billion) in an emergency rescue deal. The combined bank will have $5 trillion of invested assets, according to UBS. Credit Suisse shares plunged 54% on Monday at one point, while UBS climbed from losses to a 3.8% gain. Credit Suisse shares were choppy on Tuesday, and closed up 7% in the afternoon. UBS was 12% higher. European banks are likely to reman skittish despite added confidence, Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said by email. “ECB indicators from last week suggest further rate rises to come – a delicate balancing act in order not to push the eurozone into recession. The banking sector is most sensitive to economic stability so growth indicators will be key to watch,” Wall added. The European Central Bank hiked rates by 50 basis points last week. On Monday, ECB President Christine Lagarde said that while recent financial sector turmoil may help dampen inflation, interest rate rises would remain its primary tool in bringing down prices. On Tuesday afternoon, the yield on two-year German government bonds was up 24 basis points to 2.56%. It is on course for its biggest daily increase since September 2008, according to Reuters data. The 10-year yield was up 17 basis points to 2.27%. “We’re seeing a decrease in contagion risk as measured by various market indicators and this is allowing the market to focus back on future rate hikes,” Antoine Bouvet, head of European rates strategy, told CNBC. “This is particularly true of the ECB after a barrage of hawkish comments this week. So it makes perfect sense for Germany yields to continue rising, especially at the short-end.” Markets are bracing for the Federal Reserve’s two-day monetary policy meeting, which begins Tuesday. Traders are pricing in an 85% chance of a quarter-point rate hike, according to CME Group’s FedWatch tool. U.S. stocks were higher after U.S. Treasury Secretary Janet Yellen said Tuesday morning the government is ready to provide further guarantees of deposits for crisis-hit banks.