EUROPE MARKETS: European Stocks Continue Draghi-fueled Rally

European stock markets continued higher on Tuesday, adding to a rally from Monday driven by dovish comments from European Central Bank President Mario Draghi. The ECB boss hinted at Jackson Hole, Wyo. late Friday that full-on quantitative easing could be on the way for the region in an effort to fight off the threat of deflation.

“Markets will continue to digest Mr. Draghi’s speech at Jackson Hole,” analysts at Société Générale said in a note on Tuesday. “We continue to look for an announcement of EUR300 billion ($395.75 billion) of asset purchases at the turn of the year”.

Market moves: The Stoxx Europe 600 index climbed 0.7% to end at 342.96, closing at the highest level since late July. France’s CAC 40 index rose 1.2% to 4,393.41, while Germany’s DAX 30 index picked up 0.8% to 9,588.15.

The U.K.’s FTSE 100 index , which was closed for a bank holiday on Monday, rose 0.7% to 6,822.76.

Bank rally: The banking sector posted some of the biggest gains in Europe, fueled by the hopes of asset purchases by the ECB. Shares of BNP Paribas SA climbed 2.1% in Paris, Deutsche Bank AG (DB) added 2% in Frankfurt and UniCredit SpA jumped 2.3% in Milan. (Read more about the day’s notable movers here: http://www.marketwatch.com/story/arcelormittal-climbs-antofagasta-slides-european-movers-2014-08-26.)

French politics: France was technically without a government on Tuesday after the existing government was dissolved on Monday, following a cabinet disagreement about fiscal tightening measures. A new government is expected to be announced later on Tuesday.

Economic worries: Analysts at Credit Suisse expressed concerns about the economic recovery in the euro zone and said in a note that “unless the external environment improves, then that weakness could feed back to the domestic economy.”

The rest of the world’s overall economic health is usually a major driver for growth in the euro zone, they explained. If companies start to lose confidence in the face of weaker global demand or an escalation in the tensions over Ukraine, risks for the region could rapidly unfold, the analysts said.

“That’ll leave markets looking for a response from the ECB,” they said. “[But] growth is too weak to convince markets of the recovery’s durability, but not weak enough to embolden the ECB to do substantially more about it.”