European markets closed higher on Tuesday following good economic data from China and Europe.

The pan-European Stoxx 600 ended up 0.7 percent with most sectors and bourses trading in positive territory. The U.K.'s FTSE100 touched a record high in early afternoon trade, however, it retreated slightly to close up 0.49 percent on Tuesday. The French CAC ended 0.35 percent higher while the German DAX finished 0.12 percent in negative territory. Investors began 2017 in a confident mood after solid manufacturing activity data in Europe and China. On Tuesday morning, data showed French inflation reaching its highest level since May 2014. French consumer prices increased 0.8 percent year-on-year, driven essentially by an increase in energy prices. Banking stocks were comfortably the best performers on Tuesday, jumping more than 2.8 percent. Shares of the newly merged BPM bank in Italy surged higher for a second consecutive day and closed 7.2 percent higher. The Italian banking index ended slightly in positive territory despite news that the sale of three small banks could be at risk after the European Commission asked for the process to be delayed by at least a week, Reuters reported.

Meanwhile in the U.S., Wall Street continued higher on its first trading day of the calendar year with the Dow Jones industrial average getting ever closer to the 20,000 mark.

Back in Europe, financial services were up by more than 1.5 percent. Earlier, Euronext said it was offering 510 million euros to buy the French clearing houses of the London Stock Exchange - a much-needed process to ensure the LSE merger with the German bourse.

Basic resources stocks were also higher after figures showed Chinese factory activity growing more than expected in December. The U.K.'s ambassador to the European Union suddenly quit on Tuesday afternoon with Sir Ivan Rogers abrupt resignation catching many off guard. The departure of Rogers comes just a few weeks after he had declared that securing a post-Brexit trade deal with the bloc could take up to ten years. "Sir Ivan Rogers has resigned a few months early as UK Permanent Representative to the European Union. Sir Ivan has taken this decision now to enable a successor to be appointed before the UK invokes Article 50 by the end of March. We are grateful for his work and commitment over the last three years," said a U.K. government spokesperson shortly after the news was announced.

U.K. PMI figures surprise

Data showed British manufacturing figures growing more-than-expected in December. The U.K.'s PMI increased to 56.1 - the highest reading since June 2014. As a result, sterling moved up from 85.01 pence to 84.875 per euro. Inflation levels in Germany climbed to its highest level in over three and a half years on Tuesday with the annual rate rising to 1.7 percent, compared with 0.7 percent the month previous.

Oil prices pared gains on Tuesday having hit 18-month highs on the first trading day of 2017 suggesting that investors are relatively positive on the implementation of an OPEC deal to cut production. Crude prices were further boosted by the U.S. dollar rallying to its highest level since 2002. However prices ran out of steam shortly after the European close and Brent crude traded at around $55.80 a barrel on Tuesday, down 1.8 percent. While U.S. WTI was around $52.65 a barrel, down 1.9 percent.