5 Min Read
* Euro zone PMIs highest in nearly 6 years
* HSBC shares slide 7 pct on profit slump
* Dollar up on March rate hike talks
By Jamie McGeever
LONDON, Feb 21 (Reuters) - Figures showing the fastest pace of growth in euro zone business activity for six years propelled European stocks to a 14-month high on Tuesday, reversing an earlier fall after the continent's biggest bank HSBC reported a surprise slump in profits.
Europe's benchmark index of 300 leading shares rose 0.3 percent to 1,468 points, led by purchasing manager index (PMI) reports that showed the euro zone economy expanding much faster and more smoothly than expected.
Growth in Germany's private sector reached its highest level in nearly three years, while French business activity surged to near a six-year high. Overall, the PMIs showed that private sector manufacturing and service sector activity in the euro zone this month was its strongest since April 2011.
"The euro zone recovery powers ahead in February, with the PMIs showing a further strong acceleration from already solid levels," wrote Marco Valli, chief euro zone economist at UniCredit.
Economists at JP Morgan raised their second quarter euro zone growth forecast to 2 percent annual rate from 1.5 percent.
Germany's DAX gained 0.5 percent to hit its highest level since May 2015, while France's CAC 40 reversed earlier losses to trade 0.3 percent higher.
The turnaround in Europe followed an initial slide on HSBC's earnings. The shares in Europe's largest bank by assets fell 7 percent, on track for their biggest fall since March 2009, after the bank said pre-tax profits last year slumped 62 percent, far more than analysts had expected.
Europe's banking index was last down 1.2 percent, having fallen as much as 2 percent in early trade.
"In spite of the plunge it's still up more than 50 percent from its post-Brexit low," said Neil Wilson, senior market analyst at ETX Capital, referring to HSBC's share price.
"But all the dollar-earning upside may have been baked into the stock price already and with the pound now pretty steady, the free ride for HSBC's shares looks over."
Europe's bounce pushed U.S. stock futures further into positive territory, with Wall Street now called to open 0.3 percent higher on the first day of trading since Friday. U.S. markets were closed for the Presidents Day holiday on Monday.
MSCI's world stock index and MSCI's broadest index of Asia-Pacific shares outside Japan were both flat on the day, supported by the turnaround in Europe.
China's blue-chip index rose to its highest in over two months, extending gains from Monday - its best day in six months - on reports that pension funds would begin pumping funds into the country's stock markets.
With U.S. markets closed on Monday, Asian markets had few global cues off which to trade. U.S. futures point to a rise of around 0.1 percent at the open on Wall Street .
The upbeat European PMIs emboldened the bearish case for French bonds, which have been under mounting pressure in recent weeks as concerns surrounding the April-May presidential election have intensified.
Investors have been preoccupied by the possibility that far-right and anti-euro candidate Marine Le Pen might win.
The premium investors demand to hold French bonds instead of German debt eased slightly on Tuesday from Monday's near four-year high. The spread was last at 78 basis points, after widening out to as much as 85 bps on Monday .
"It seems that, more and more, investors just want to get out of French bonds and are trying to take advantage of any chance to sell them," DZ Bank Daniel Lenz said.
In currencies, the euro failed to get any traction from the PMI data, and was last down 0.7 percent at $1.0535 and on course for its biggest fall in a month.
A slide in short-dated German bond yields to a record low -0.866 percent dulled the euro's allure, while the dollar gained ground in line with a tentative move back up in U.S. bond yields.
The greenback rose 0.5 percent against the yen to 113.65 yen , and the 10-year U.S. government bond yield rose 3 bps to 2.45 percent after two Federal Reserve policymakers pointed to the potential for U.S. interest rates to rise next month.
Oil prices rose, with Brent futures up 1.6 percent to $57.05 a barrel and U.S. West Texas Intermediate crude for April delivery up 1.7 percent to $54.33 a barrel.
Reporting by Jamie McGeever; Editing by Gareth Jones