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European equity indices rebounded from yesterday’s extensive sell-off thanks to a recovery in the mining sector and better-than-expected earnings from HP. The DJ Euro-Stoxx gained 0.5% to 3,295, the FTSE 100 gained 1% to 5,371 and the DAX Index grew 0.6% to 6,317.

European bonds reversed their earlier course and were well bid after the German Economy Ministry said the growth outlook in Germany has “darkened.” The uncertainty plaguing the European economies were also well reflected in the BOE August policy minutes which revealed a three-way-split between policy makers. Bonds were also supported by Eurozone Construction output data, which fell at 2.4% annualized rate in June. The 10yr Gilt gained 0.25%, pushing its yield down 3bps to 4.553%; and the 10yr Bund was up 0.33%, lower its yield 4bps to 4.303%.

EUR/USD and Cable were each generally range-bound in the European session, while EUR/GBP broke out a narrow range to peak out at 0.79355 before slipping into the red after the European close.

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European equities got slammed for a second consecutive day off heightened banking concerns and JPMorgan’s prediction that Lehman may post an additional $4bln in credit-related write-downs. This particularly hurt banking stocks, as Barclay’s fell 5.4% and Societe Generale fell 4.2%. CIBA fell 17%, its worst decline since its ’97 IPO, after revealing an unexpected Q2 loss. The DJ Eurostoxx fell 2.6%, the FTSE 100 fell 2.4% and the DAX fell 2.35%. Better-than-expected ZEW confidence data out of the EU and Germany failed to curb today’s sell-off.

European bonds also came under selling pressure despite the rout on equities with the German 10yr bund, down 0.19%, improving its yield 2bps to 4.16% following higher than expected July PPI data from Germany. The 10yr gilt is marginally higher with a yield of 4.587% after the BOE’s Besley forecast UK CPI to return to around 2% by late ’09.

EUR/USD spent most of the session in the red, despite the higher than expected Germany PPI data, but has trended higher since and is currently near session highs, just under the 1.4780 handle. Cable also spent most of the European session in the red, falling as low as 1.8537, but has since rebounded to flat on the day at 1.86659. GBP/JPY, down 0.4% to 204.60, continues to face selling pressure going into the afternoon session.EUR/GBP is up 0.5% to 0.7919, EUR/CHF is flat at 1.613 and GBP/CHF is down 0.5% to 2.0375.

Tomorrow’s European data includes June Construction Output, expected to gain 0.2% on the month while the y-o-y reading is expected at -1.1%. Tomorrow’s UK data includes minutes from the BOE August policy meeting, July Public Sector Finance and the July M4 money supply.

The head of Germany’s ZEW Wolfgang Franz said he saw no sign of recession in Germany and that he sticks to a GDP growth forecast 0f 2%-2.5% .

The GDP forecast was far removed from a recession, he said, adding what Germany was experiencing was a slowing growth momentum.