Automakers lift European shares to more than two-week high

By Sruthi Shankar and Medha Singh

(Reuters) - A surge in automakers and strong earnings from Europe's banking heavyweights lifted the main STOXX 600 index to its highest level in more than two weeks on Tuesday, with investors taking political upheaval in Britain and Spain in their stride.

The pan-European benchmark <.STOXX> closed at its highest since July 4 as automakers <.SXAP> rallied 3.8% for their strongest performance since early January.

French auto parts supplier Faurecia jumped 11.5% after it maintained first-half profitability despite a China-led decline in production, while Germany's Continental rose 6.3% despite issuing yet another profit warning the previous day, while rival Hella gained 6.8%.

"Industrials are up because they are cheap and unloved and none of them produced bad enough numbers," said Toby Clothier, co-head of Global Thematic Group at Mirabaud Securities in London.

"There is clearly some switching to cyclical things that are cheap in terms of old-fashioned metrics - earnings, dividend yield."

After a heavy sell-off in May on worries about a protracted U.S.-China trade dispute denting corporate profits, investors have bought back into stock markets in Europe and elsewhere on expectations that leading central banks will loosen monetary policy to encourage growth.

The European Central Bank could set the stage for a September interest rate cut when it meets on Thursday and the U.S. Federal Reserve is expected to cut rates by 25 basis points next week.

Europe's banking index <.SX7P>, which has lagged most other sectors this year on expectations of lower interest rates, gained 2% after Swiss lender UBS reported its best second-quarter results in nearly a decade, lifting its shares by 2.6%.

Austrian chipmaker AMS , meanwhile, climbed by 7.3% after it forecast a strong third quarter, helping to drive a 1% advance for the tech index <.SX8P>.

Despite largely positive earnings so far, investors are concerned momentum could soon falter. Data from Refinitiv showed companies listed on the STOXX 600 index are expected to report a 0.5% drop in second-quarter earnings, a reversal from 0.2% growth forecast a week ago.

Away from earnings, German carmaker Daimler rose 4.4% on news that China's Beijing Automotive Group Co (BAIC) had bought a 5% stake in the company. The Auto-heavy German market <.GDAXI> was Europe's biggest gainer, rising 1.6%.

The weak pound allied with the international exposure of London's FTSE 100 <.FTSE> helped the index to firm slightly after Boris Johnson won the contest to be Britain's new prime minister, with investors concerned he could lead Britain towards a no-deal Brexit.[GBP/] [.L]

Better than expected results for Spanish lender Santander , which gained 3.6%, helped investors shrug off news that Spain's Socialist leader Pedro Sanchez failed in a first attempt to win parliament's backing to form a government. He now has two days to try to strike a deal with the far-left Unidas Podemos before the second vote.

(Reporting by Sruthi Shankar and Medha Singh in Bengaluru; Editing by David Goodman)