European shares set for best week in two months despite volatility

By Susan Mathew

(Reuters) -European shares were set to notch 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 rose 0.4% on the day after struggling for direction in the prior session following an aggressive 50-basis point rate hike, the first increase by the European Central Bank in 11 years.

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 speedy downturn in manufacturing and a near-stalling of service sector growth.

Gains on Friday were led by sectors that are more resilient to uncertainty such as utilities, food and beverages and real estate stocks.

Cyclical stocks such as banks, automakers and miners lost between 0.5% and 1.2%., while rising oil prices lifted heavy-weigh energy stocks 0.7%. [O/R]

“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.”

After a volatile session following the resignation of Prime Minister Mario Draghi on Thursday, Italian shares rose 0.5% as the country prepared for a snap national election on Sept. 25.

For the week, major European bourses were set to end higher, with the STOXX 600 up almost 3%. But fears of rising borrowing costs sparking a recession, a weak euro and the Ukraine war have pushed the index down more than 12% for the year.

In earnings reports, Danske Bank fell 2.7% as it axed dividends, while Swiss elevator and escalator manufacturer Schindler slipped 4.2% after cutting 2022 revenue guidance.

Aluminium-maker Norsk Hydro rose 6% after proposing an extra dividend and offering share buybacks.

Lloyd’s of London insurer Beazley topped the STOXX 600 as it raised full-year profitability outlook.

(Reporting by Susan Mathew in Bengaluru; Editing by Rashmi Aich and Arun Koyyur)