European shares log best week in two months despite volatility

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, July 21, 2022. REUTERS/Staff
  • STOXX 600 rise 2.9% this week
  • Defensive sectors lead gains
  • Euro zone PMIs unexpectedly contract in July
  • Danske banks slips on axing dividends

July 22 (Reuters) - European shares notched up their best week in two months on Friday as concerns over an energy supply crunch eased, bringing some calm to investors worried about a big rise in interest rates and a political crisis in Italy.

The pan-European STOXX 600 index (.STOXX) closed 0.3% up at its highest level since June 10, while for the week it jumped nearly 2.9%.

While Russian gas flows to Europe resumed after a scheduled maintenance outage, market participants fretted as euro zone business activity unexpectedly shrank in July, due to a downturn in manufacturing and a near-stalling of service sector growth. read more

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The data came a day after the European Central Bank delivered an aggressive 50-basis point rate hike, its first increase by in 11 years to combat soaring inflation. read more

The data prompted traders to reprice their interest rate expectations as they now expect 105 bps of ECB rate hikes by December, down from around 120 bps before the data, according to Refinitiv data.

ECB policymaker Peter Kazimir on Friday said the central bank may raise interest rates by 25 or 50 basis points in September.

"We retain a cautious view on European stocks as the ECB treads a fine line between fighting inflation and avoiding recession," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

"The abandonment of forward guidance will likely spur rate volatility ahead of the next ECB meetings, as investors are left to speculate about the size of future hikes."

Gains on Friday were led by sectors that are more resilient to uncertainty such as real estate (.SX86P), up 4.3%, followed by utilities (.SX6P), and food and beverages (.SX3P) stocks.

Economy-linked stocks such as banks (.SX7P) dropped 1.2%, while rising oil prices lifted heavy-weigh energy stocks (.SXEP) 1.2%.

After a volatile session following the resignation of Prime Minister Mario Draghi on Thursday, Italian shares (.FTMIB) inched up 0.1% as the country prepared for a snap national election on Sept. 25. read more

Fears of rising borrowing costs sparking a recession, a weak euro and the Ukraine war have pushed the STOXX 600 index down 12.7% for the year. All eyes are now on the second-quarter reporting season for clues on the health of corporate Europe.

In earnings reports, Danske Bank (DANSKE.CO) fell 2.2% as it axed dividends, while Swiss elevator and escalator manufacturer Schindler (SCHP.S) slipped 3.9% after cutting 2022 revenue guidance. read more

Just Eat Takeaway (TKWY.AS) jumped 13.8% after the online takeaway food company's German rival Delivery Hero (DHER.DE) forecast a smaller loss as it shifted its focus to profitability. read more

Aluminium-maker Norsk Hydro (NHY.OL) gained 6.4% after proposing an extra dividend and offering share buybacks. read more

Uniper (UN01.DE) plunged 28.9% after the German government stepped in to rescue the gas importer with a 15 billion euro ($15.28 billion) bailout. read more

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Reporting by Susan Mathew and Devik Jain in Bengaluru; Editing by Rashmi Aich, Arun Koyyur and Alison Williams

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