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European shares rally on Summers' withdrawal, Syrian deal

LONDON (Reuters) - European stocks rallied on Monday on expectations the Federal Reserve would keep an easier monetary policy for longer after Lawrence Summers, widely regarded as the most hawkish candidate to head the central bank, withdrew from the race.

Demand for equities was also bolstered by an international deal to destroy Syria's chemical arsenal, which put off a U.S.-led attack against the country and allayed the spectre of a broader conflict in the oil-producing Middle East.

The pan-European FTSEurofirst 300 index was up 0.7 percent at 1,259.18 points while the euro zone Euro STOXX 50 index <.STOXX50E> rose 0.8 percent to 2,891.23 percent at 0703 GMT.

Investors wagered that the Fed would take a more gradual approach to tightening its policy after a surprise withdrawal by Summers, who had been perceived as less supportive of the bank's equity-friendly monetary stimulus programme than the other main candidate, Janet Yellen.

Summers' decision comes just before the central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its asset purchases, which have helped the Euro STOXX 50 <.STOXX50E> index rise nearly 20 percent in the past year, from the current pace of $85 billion a month.

"Our basis hypothesis is that the central bank will remain behind (markets) and with Ms Yellen there is no doubt that it will be that way," said François Duhen, a strategist at CM-CIC Securities in Paris, adding that he was set to cut its forecasts for the dollar following Summers' announcement.

"For stock markets this is obviously favourable."

Among single stocks, Swedish budget fashion retailer Hennes & Mauritz (HMb.ST) rose 2.6 percent after it recorded stronger-than-expected growth at its stores in August.

Expectations of a diplomatic solution to the Syrian crisis, which first emerged early last week, and generally positive global economic data helped the Euro STOXX 50 rise to two-year highs last week, while European equity funds posted their second biggest inflow year-to-date, EPFR data showed.

(Reporting By Francesco Canepa; Editing by Toby Chopra)