STOXX 600 closes flat as ECB boost counters pressures from yields

By Nikhil Sharma and Purvi Agarwal

(Reuters) -European shares pared declines to close flat on Thursday, after the European Central Bank's interest rate cut boosted bank stocks, offsetting pressures from rising long-term bond yields.

The pan-European STOXX 600 recovered from a 0.9% decline to close flat.

The ECB reduced interest rates as expected and signalled more cuts may be in store as inflation normalises, even as a looming trade war with the U.S. and plans to boost military spending drive Europe's biggest economic policy upheaval in decades.

"(The ECB is) keeping maximum flexibility given the high levels of uncertainty", said Maximilian Kunkel, chief investment officer for Germany at UBS. "There is uncertainty around the policies from the U.S. administration."

Banks rose 0.8% to a record high, but gains were capped by steep declines in British banks. Excluding the UK, bank stocks were 2.6% higher, while the London banks index shed 2.7%.

Construction and materials stocks, along with industrial goods, had the biggest boost, gaining 2.2% and 0.9% respectively.

"Areas likely to benefit from the change of heart from policy makers (like banks) continue to benefit while overall markets are supported by this mix of more pro growth fiscal policy and a supportive monetary policy backdrop", Kunkel said.

The parties hoping to form Germany's next government agreed on Tuesday to create a 500 billion euro infrastructure fund and overhaul borrowing rules, in a fiscal "bazooka" for the ailing economy.

Yields on longer-dated bonds continued to rise across the board, on expectations of higher supply. The one on the German 10-year bond was last at 2.835%, at levels not seen since October 2023.

The rise pressured rate-sensitive sectors such as real estate, which led sectoral losses with a 2.7% fall. Healthcare was the biggest drag with a 1.2% decline.

Some caution around U.S. President Donald Trump's 25% tariff on imports of European cars and other goods also loomed, with no clear details on their implementation.

However, an exemption on automakers that complied with the existing free trade agreement between the U.S., Mexico and Canada on Tuesday, with Trump saying he was open to more exemptions, raised hopes of a less stringent approach to duties.

The automakers and components index jumped 2.1%. Shares of Volkswagen rose 3.9%, BMW gained 4.3% and Stellantis advanced 2.1%.

Among other stocks, Melrose fell 18.2% to the bottom of the STOXX 600 after the GKN Aerospace owner forecast 2025 revenue below most analysts' expectations.

Postal giant DHL gained 14.2% after unveiling plans to cut about 8,000 jobs in Germany this year after reporting a 7% fall in its annual operating profit.

(Reporting by Nikhil Sharma and Purvi Agarwal; Editing by Sonia Cheema, Shinjini Ganguli, Devika Syamnath and Alan Barona)