European shares hit highs as PMI data comes as New Year's gift

By Kit Rees and Atul Prakash

LONDON (Reuters) - Major European equity indexes climbed to new highs in thin trading on Monday, with strong manufacturing reports from the region boosting sentiment on the first trading day of 2017.

Italy's FTSE MIB index was up 1.7 percent at its close, hitting its highest level since January 2016. Germany's DAX rose 1 percent after reaching to its highest in nearly 17 months, while France's CAC gained 0.4 percent following a 13-month peak earlier in the day.

The euro zone's blue-chip Euro STOXX 50 index was up 0.6 percent, the highest level since December 2015, with a brighter macroeconomic picture helping the broader market. The pan-European STOXX 600 rose 0.5 percent and held at one-year highs.

British and Swiss markets were closed.

IHS Markit's 2016 manufacturing Purchasing Managers' Index for the euro zone registered 54.9 in December, its highest since April 2011. That was well above both the 50 mark which separates growth from contraction, and above November's 53.7.

German manufacturing growth reached its highest in almost three years, driven by rising demand from Asia and the United States. French manufacturing hit a 5-1/2 year high, and Italian manufacturing activity grew at its fastest rate since June.

"It's nice to see some good economic numbers on the first trading day of the ... year. It has improved sentiment and could help the market to set new highs in the coming months," said Koen De Leus, chief economist at BNP Paribas Fortis.

"However, the road ahead looks bumpy because of several political risks in Europe. Overall, I am positive on European stocks this year as valuations are quite attractive compared to the United States and company margins are slowly improving, helped as well by the cheap euro."

Italian shares were also boosted by a rally in the country's lenders. The Italian banking index rose 2.3 percent, supported by a 9.1 percent jump in Banco BPM on the first day of trading for the newly merged bank.

Banco BPM said on Monday that the new lender, created after a merger between Banco Popolare and BPM, started with a share capital of 7.1 billion euros.

Other Italian banks were also up, with shares in UBI Banca and Bper Banca up 4.9 percent and 4.2 percent respectively.

Trading was thin, with volumes at 35 percent for the CAC index and 41.8 percent for the euro STOXX 50 of their 90-day daily averages.

Britain's blue-chip FTSE 100 index closed 2016 at a record high on Friday after clocking a yearly gain of 14.4 percent, the best performer among major European stock indexes, with a sharp decline in sterling after the vote to leave the EU helping exporters and stronger metals prices boosting miners.

(Reporting by Kit Rees and Atul Prakash; Editing by Alison Williams)