European stocks recorded their biggest advance in over four years as investors rushed to buy shares following an agreement between the United States and Iran to implement a two-week cease-fire, in exchange for Tehran reopening the Strait of Hormuz.

By the close of trading, the Stoxx Europe 600 index had surged 3.9%, marking its largest single-day gain since March 2022. Stocks that had declined the most during the conflict recorded some of the strongest increases. Both easyJet and TUI Group rose more than 10%, with travel and tourism stocks leading the index higher. The energy sector was the only segment to decline.

An AJ Bell market director commented that investors are attempting to bet on a shift in market sentiment, purchasing assets that have been heavily sold off in recent weeks while selling those that have performed well.

The agreement provides time for the U.S. and Iran to negotiate a longer-term deal to end the conflict, which has triggered a global energy crisis. The rally was also amplified by substantial short positions in the market, as well as bearish positions held by systematic investors.

Barclays strategists noted that equity markets could experience a "powerful short squeeze" as hedge funds and commodity trading advisor funds unwind protective positions established to hedge against the war.