By Natsuko Waki
LONDON (Reuters) - Banks led European shares higher on Monday ahead of this week's key earnings data which will show their progress on writing down losses related to U.S. subprime mortgages, while the dollar edged away from a 1-1/2 week low.
Weekend news that the British government is to nationalize Northern Rock
This week's earnings results from scandal-hit French bank Societe Generale
The extent of the sector's damage from the credit crisis holds the key to investor risk sentiment and the performance of risky assets including stocks after some share indexes dipped into a bear market cycle -- a period of prolonged losses.
"This is a bear market, and there will be some rallies in it," said Justin Urquhart Steward of 7 Investment Management.
"The focus this week is going to be on the banks, as investors scrutinize their results to see if they've put off balance sheet things that should actually be on balance sheet, and whether we've actually been led a merry dance."
The FTSEurofirst 300 index <.FTEU3> was up 1 percent while MSCI main world equity index <.MIWD00000PUS> was up 0.1 percent.
The iTraxx Crossover index, the mostly-widely watched indicator of European credit market sentiment, tightened to 565 basis points, after hitting record wides last week due to concerns about forced selling on credit products.
Emerging sovereign spreads <11EMJ> widened 3 basis points while emerging stocks <.MSCIEF> was down almost 0.2 percent
The March Bund future
DOLLAR UP BUT VULNERABLE
The dollar rose 0.1 percent against a basket of major currencies <.DXY>, gaining some support from firmer stocks and recouping some of the losses made on Friday after data showed U.S. consumer sentiment fell to a 16-year low.
Investors expect the Federal Reserve to cut interest rates by 50 basis points in March, adding to the total of 225 bps of rate reduction since September -- moves which have depressed the dollar.
"The lethal combination of weakening house prices, high energy prices, tighter lending and volatile asset markets will be difficult to overcome and even the prospect of further rate cuts could do little in this environment," Calyon said in a note to clients.
U.S. light crude
Platinum surged to $2,087 an ounce on lingering power supply shortages which have disrupted mining in main producer South Africa. Gold was slightly firmer on the day at $904.90 an ounce.
(Additional reporting by Sitaraman Shankar)
