Europe: Banks drag shares down as central banks join Federal Reserve in raising rates

EUROPEAN equities inched down on Thursday with banks leading declines after the Bank of England followed the US Federal Reserve and the Swiss National Bank in hiking rates amid worries of a banking contagion.

The continent-wide Stoxx 600 index slipped 0.2 per cent after closing at its highest level in more than a week on Wednesday.

US stock indexes rallied following a turbulent session on Wall Street where the Fed lifted its interest rate by a widely expected 25 basis points and signalled that they are unlikely to climb much higher.

“The market is still pricing more than two rate cuts by year-end. We doubt this pricing can really stand against sticky inflation, growth in the US, but also in Europe and China actually reaccelerating,” said Max Kettner, chief multi-asset strategist at HSBC Global Research.

The Swiss National Bank raised its benchmark interest rate by 50 basis and Norway’s central bank hiked by 25 basis points, both in line with market expectations.

The Bank of England, meanwhile, raised interest rates by a further quarter of a percentage point and said it expected the surge in British inflation to cool faster than before.

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UK’s exporter-heavy FTSE 100 index slid 0.9 per cent as pound rallied against the dollar after the BoE decision.

Further weighing on the mood, US Treasury Secretary Janet Yellen told lawmakers that she had not considered or discussed “blanket insurance” to banking deposits after the failure of two US mid-sized lenders earlier this month.

European banks fell 2.4 per cent after a tentative rebound earlier this week when UBS Group agreed to buy embattled Swiss lender Credit Suisse in a US$3 billion rescue deal.

The index is down about 15 per cent so far in March and set for its worst monthly showing in three years when the onset of Covid-19 pandemic fuelled a sharp global selloff.

Citigroup downgraded the sector, warning the rapid pace of interest rate hikes would further weigh on economic activity and lenders’ profits.

“We’ve got a market that’s been chopping around a fair bit,”said Gerry Fowler, head of European equity strategy at UBS.

“There are definitely investors who have lingering concerns that rate hikes that are supporting the profit recovery for banks may be curtailed by the tightening in financial conditions, that their profitability is going to be a little more impaired because they have to pay higher deposit rates to maintain their deposit bases.”

Among single stocks, Sanofi rose 5.5 per cent after the French drugmaker said its asthma and eczema drug Dupixent, jointly developed with Regeneron, met all targets in a trial to treat “smoker’s lung”.

Dutch tech investor Prosus climbed 6.4 per cent after Chinese video-game company Tencent said it would restrict its focus to its core business, while maintaining cost-cutting and improving efficiencies.

The broader technology index gained 2.2 per cent, limiting losses on the broader index.

Sweden-based bank Svenska Handelsbanken AB fell 11.1 per cent on trading ex-dividend. REUTERS