German share price index DAX graph is pictured at the stock exchange in Frankfurt
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, September 26, 2022. Reuters

Europe's STOXX 600 index rose on Tuesday, led by automakers and travel stocks following a three-day selloff triggered by global recession fears, while Italian payments group Nexi topped the benchmark index on a strong business outlook.

The continent-wide index was up 1.2%. The index lost 4.8% in the last three sessions after downbeat data on regional economic activity and policy tightening by several global central banks deepened fears of a recession.

"We are seeing a little bit of relief rally or a dead cat bounce. But it seems to me, at the moment, anything really worth owning is the dollar. Equities continue to come lower, the outlook for risk is poor and yields are just going to continue moving higher," said Michael Brown, head of market intelligence at payments firm Caxton in London.

"The market is underpricing, in my view, the risks to the outlook in terms of growth as well. Fundamentally, the path of most assets, particularly equities, is to the downside unless the Fed make a pivot to a more dovish stance."

Euro zone government bond yields hit new multi-year highs on Tuesday as investors positioned for more interest rate hikes and the impact from the UK's "mini budget" continued to reverberate around financial markets.

Last week, the Federal Reserve caught markets off-guard after signalling a longer-than-expected trajectory of higher U.S. rates.

Goldman Sachs expects the European Central Bank to hike rates by 75 basis points at its next two meetings, Bloomberg News reported. The ECB has already raised its key rate by 125 basis points to 0.75%, the fastest pace of rate hikes in its history.

The STOXX 600 dropped 5.2% so far this month, set for its second straight monthly loss, as Europe grapples with energy and the cost-of-living crises amid the Russia-Ukraine war hampering gas flows, and hawkish central bank moves.

All European sector indexes rose, with automakers and travel and leisure climbing more than 2% each.

Italian shares added 1.2%, extending a rally after the right-wing coalition led by Georgia Meloni overwhelmingly won the national election.

Italian election results reduced political uncertainty, Moody's said on Monday, adding that coalition policy choices still remain unclear.

Shares of Nexi gained 7.5% after the company estimated an excess cash generation of around 2.8 billion euros ($2.70 billion) in 2023-2025 which can be used to pursue M&A opportunities or to return capital to shareholders via buyback and dividends.

Hugo Boss AG slipped 0.8% after Deutsche Bank downgraded the German fashion house's stock to "hold", citing "fading tailwinds".