By Sara Sjolin, MarketWatch
LONDON (MarketWatch) -- Germany's DAX 30 index led European stocks markets higher on Thursday, with the benchmark settling at its highest level in almost five years on the back of surprisingly strong factory-order data.
The broader markets held on to gains, after the European Central Bank kept interest rates unchanged as expected and as investors watched developments in Washington regarding the so-called fiscal cliff.
The pan-European Stoxx Europe 600 index rose 0.7% to 278.82, the strongest closing level in 2012.
"Markets are anticipating that a deal over the fiscal cliff will be done. They are saying 'Look, there's no alternative to a deal and there may be quite a bit of difference between the Democrats and the Republicans, but at least we know where their boundaries lie'," said Mike Lenhoff, Chief Strategist at Brewin Dolphin.
"It will work as a great stimulus for the global economy when the fiscal cliff gets resolved. It has been the key thing inhibiting growth because U.S. corporations have been reluctant to commit themselves to investments. It all has to do with the uncertainty arising from the fiscal cliff and recession fears," he said.
Germany's DAX 30 index closed 1.1% higher at 7,534.54--its highest closing level since January 2008. The index was boosted by data for factory orders in October, which jumped 3.9%. Economists had forecast a rise of around 0.9%.
Shares of Beiersdorf AG rose 2%, after the consumer-products firm raised its sales growth forecast for 2012 to more than 4% from 3-4% previously.
Among other notable gainers, shares of European Aeronautic Defence & Space Co. jumped 8% after the firm said late Wednesday that it would undertake a major share-structure overhaul. It will replace its current structure with a "normal company governance scheme," which will result in Daimler AG and Lagardere SCA reducing their stakes in the firm.
Daimler said Thursday it sold off a 7.5% stake in EADS as planned. Its shares rose 1.2%, while those of LagardÃ¨re fell 2.8%, after Deutsche Bank cut the stock to sell from hold.
ECB stands pat
European interest rates were also in focus on Thursday, after the European Central Bank left its key lending rate at a record low 0.75%. At the following news conference, ECB President Mario Draghi said there had been a "wide" discussion on interest rates, but that the "prevailing consensus" was to leave them unchanged..
In addition, ECB economists cut their projections for 2012 and 2013 for the euro-zone economy.
The Bank of England also stood pat and left the size of its asset-purchase program at 375 billion pounds ($604 billion), while keeping its lending rate at a record low 0.5%, where it has stood since March 2009.
Investors also tracked developments in U.S. budget negotiations. President Barack Obama and House Republican leaders dug in on their positions Wednesday. .
Some analysts, however, saw potential for progress.
"A growing number of Republicans have indicated that they are willing to accept a deal that will allow the Bush tax cuts for the most affluent to expire in 2013," analysts at Danske Bank said in a note.
"This is the most important demand by the Democrats in order to reach an agreement," they said.
On the data front in the U.S., initial jobless claims for last week printed at 370,000, down 25,000 from the previous reading and slightly better than expected.
U.S. stocks traded higher on Wall Street.
Italy's FTSE MIB index bucked the positive trend across Europe and dropped 0.8% to 15,835.22, on concerns the country's government could collapse after a parliamentary confidence vote on a government decree.
Among notable movers in Europe, shares of Rolls-Royce Holdings PLC fell 3.1% in London, after the power-systems firm said individuals and the company could be prosecuted in cases related to overseas corruption and bribery.
The FTSE 100 index added 0.2% to 5,901.42.
France's CAC 40 index rose 0.3% to 3,601.65, with shares of Technip SA up 0.4%. The oil-field-services firm said it was awarded a contract to develop the Starfish Field in Trinidad and Tobago.
Pointing in the other direction, shares of GDF Suez SA slumped 11%, after the energy distributor late Wednesday confirmed its financial targets for 2012, but said recurring income would decline in 2013.
The company's chairman and chief executive, Gerard Mestrallet, further said Thursday that GDF expects to lose around 185 million euros ($242.2 million) in 2012 as regulated energy tariffs set by the French government won't offset supply costs..
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