German DAX climbs to 1-1/2-year high on US debt ceiling optimism

France's CAC 40 jumped 1% to a two-week high and Italy's FTSE MIB rose 1.4% to a three-week peak. U.S. stocks rallied on Wednesday after President Joe Biden and top U.S. congressional Republican Kevin McCarthy reiterated their determination to strike a deal soon to raise the debt ceiling and avoid an economically catastrophic default.

European stocks climbed on Thursday, with Germany's blue-chip index scaling to its highest in more than one year, boosted by signs that Washington was edging closer to a deal to raise the U.S. debt ceiling and avoid a default.

The continent-wide STOXX 600 index rose 0.5%, while Germany's blue-chip DAX rallied 1.3% to its strongest level since January 2022. France's CAC 40 jumped 1% to a two-week high and Italy's FTSE MIB rose 1.4% to a three-week peak.

U.S. stocks rallied on Wednesday after President Joe Biden and top U.S. congressional Republican Kevin McCarthy reiterated their determination to strike a deal soon to raise the debt ceiling and avoid an economically catastrophic default. "Both sides are using more positive language and have stepped back somewhat from the aggressive stances they were previously exhibiting. Of course, this does not mean an agreement is on the table, but it does suggest a compromise will be found," said Stuart Cole, chief macro economist at Equiti Capital.

"If you think that a default will be avoided, you want to be going back into the more riskier stocks and assets now." Volkswagen climbed 2.2% on the carmaker's plans to overhaul its core brand to increase efficiency and returns.

Shares of Deutsche Bank AG edged 0.2% higher, recouping earlier losses after the lender agreed to pay $75 million to settle a lawsuit by women who say they were abused by the late financier Jeffrey Epstein, and accused the German bank of facilitating his sex trafficking. The main European stocks benchmarks have struggled to break out of a range this month as investors weighed the risks of further monetary policy tightening by the European Central Bank (ECB) as well as a potential U.S. recession.

Euro zone inflation accelerated last month, data on Wednesday showed, with overall price growth accelerating to 7% in April from 6.9% a month earlier. Markets see the ECB's 3.25% deposit rate rising to just below 3.75% this summer, but some policymakers have already warned that this may not be enough.

The ECB will need to keep raising interest further though most of the tightening has already been done, ECB's Vice President Luis de Guindos said. Among other stocks, Italian energy services group Saipem climbed 4.3% after it won two offshore contracts worth about $850 million.

In Britain, however, disappointing updates from broadband and mobile operator BT Group and luxury brand Burberry limited gains in the blue-chip FTSE 100. Several markets, including those in the Nordics and Switzerland, were closed for Ascension Day.