* Euro zone blue chips hit mid-June 2018 highs
* Pan-European STOXX 600 highest since July 31
* EU leaders choose France's Lagarde as next ECB chief
* Euro zone bond yields touch record lows
* Defensive sectors outperform European markets
* Italian shares jump 2.4% on avoiding EU sanction threat
(Updates to close)
By Susan Mathew and Thyagaraju Adinarayan
July 3 (Reuters) - Euro zone stocks surged on Wednesday as
investors piled into firms with big dividends on hopes European
Central Bank chief nominee Christine Lagarde will maintain the
ECB's dovish stance, while Italian shares jumped over 2% on
avoiding a EU sanction threat.
The blue-chip euro zone STOXX .STOXX50E index closed up
0.9% having touched its highest level since mid-June last year,
while the pan European STOXX 600 .STOXX was also up 0.9% after
hitting its highest since end-July last year.
The benchmark STOXX 600 index has risen 20% from a low hit
in December last year.
Defensive sectors powered the rally as investors searched
for yield amid expectations that interest rates will remain
ultra low for longer with Lagarde at the ECB helm, replacing
Mario Draghi.
Healthcare .SXDP shot to multi-year highs and food &
beverage .SX3P reached all-time highs; real estate .SX86P ,
which benefits from low rates, rose more than 1.3%
If she is confirmed in the post, investors hope Lagarde will
continue the ECB's recent accommodative policy which, echoed by
the U.S. Federal Reserve, helped European markets recover in
June from a sharp fall the month before. "The main concern for markets had been an interruption of
the return to accommodative policy Draghi has outlined for
September, but a continuation and even expansion of easing is
possible when Lagarde assumes control in October," said David
Zahn, head of European fixed income at Franklin Templeton.
"The appointment has reconfirmed the idea that the ECB will
support the market over the short-to-mid-term at least."
Euro zone government bond yields fell to fresh record lows.
Bank stocks .SX7P , which tend to suffer in a low interest rate
environment, rose 1.4%, underperforming the broader index.
Some investors cautioned that Lagarde's appointment did not
change their view that the region would continue to struggle
with weak growth, continued tension between Rome and Brussels
over budget deficits and worries about Brexit.
"While the IMF chief is considered a qualified candidate,
that won't necessarily make Europe a more attractive place to
invest over a tactical horizon," said Mark Haefele, chief
investment officer at UBS Global Wealth Management.
ITALY ESCAPES PUNISHMENT
Italy's MIB .FTMIB touched a two-month peak, with its bank
index .FTIT8300 surging 5%, after the European Commission
dropped its threat of disciplinary action against the country as
Rome took action to bring its growing debt into line with the
bloc's fiscal rules. Putting a damper on some chip stocks was news that the U.S.
Commerce Department's enforcement staff were told this week that
China's Huawei should still be treated as blacklisted, a stark
difference from U.S. President Donald Trump's statement over the
weekend vowing to ease a ban on sales to the firm. European chipmakers STMicroelectronics STM.MI and Infineon
IFXGn.DE fell 0.6% and 0.9% on the news, while Siltronic
WAFGn.DE was hurt further by a Deutsche Bank target price cut.
German lighting group Osram OSRn.DE shot up 11.5% to the
top of the STOXX 600 after sources said its supervisory board is
convening an extraordinary meeting on Thursday to discuss a
takeover offer from private equity firms Bain and Carlyle.