European Shares Record Best Week In Two Months Despite Volatility

On Friday, European stocks saw their best week in about two months, as there was an easing in concerns about an energy crunch in the region. This calmed down investors who had been worried about a big increase in the interest rates, along with the Italian political crisis.

Worrying data

There was a 0.3% increase in the STOXX 600 index of the continent, which took it to the highest the index has been since June 10 and it recorded 2.9% gains for the week as well. Moreover, gas flows from Russia resumed to Germany after the annual maintenance of the gas pipeline was over. But, market participants were still fretting because business activity in the euro zone shrank in July rather unexpectedly.

This was because the service sector in the euro zone had become almost stalled and the manufacturing sector saw a downturn. This data came a day after an interest rate hike was delivered by the European Central bank (ECB) on Thursday, which is the first increase seen in the last 11 years, made for combating inflation.

Change in expectations

The disappointing data prompted market participants to adjust their interest rate hike expectations from the ECB down the road. Traders have now repriced interest rate hikes of 105 basis points by December, which is down from the 120 basis points prediction before the data.

Peter Kazimir, a policymaker for the ECB, said on Friday that the bank may increase the interest rate in September by 25 or 50 basis points. Market analysts said that the ECB is trying to walk a fine line between avoiding an economic recession and taming inflation, which means a cautious view should be taken in respect to European stocks.

The rate volatility before the next meetings of the ECB is expected to be high because the bank is not providing any forward guidance and this means investors can only speculate about the magnitude of future rate hikes.

Friday gains

Sectors that tend to be more resilient to uncertainty recorded the most gains on Friday, which include real estate stocks that climbed by 4.3%. Others included utilities as well as food and beverage stocks. There was a drop in stocks linked to the economy, such as banks, which shed 1.2%, while energy stocks recorded 1.2% gains due to a rise in oil prices.

Italian shares rose 0.1% after a volatile trading session due to the resignation of Prime Minister Mario Draghi, as the country gears for a new bout of elections on September 25th. The STOXX 600 has declined by almost 12.7% this year because of a weakening euro, fears of high interest rates triggering an economic recession, and the Russia Ukraine war.

Investors are now focused on the second quarter earnings report, as they will provide clues about Europe’s corporate health. There was a 2.2% fall in Danske Bank, as it announced no dividends, and a 3.9% drop was recorded in Swiss escalator and elevator manufacturer Schindler after it reduced its revenue guidance for the year.

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