European shares hold firm as dovish Fed overshadows ECB rate cut snub

By Ankika Biswas

(Reuters) -European shares largely held their ground on Thursday as investors shrugged off the European Central Bank pushing back against market bets of interest rate cuts and cheered the U.S. Federal Reserve’s dovish shift a day earlier.

The pan-European index advanced 1.4% by 1355 GMT, holding a near two-year high, and the euro zone’s top blue-chip index gained 0.8%, reaching an over 22-year high.

Both the indexes briefly pared their gains after the ECB pushed back against bets on imminent cuts to interest rates by reaffirming borrowing costs would remain at record highs despite lower inflation expectations. The central bank, however, kept rates steady as widely expected.

“Market’s still reacting to a surprising dovish shift from the Fed, while the ECB was relatively hawkish due to lack of indication of even considering cuts,” said Patrick Armstrong, chief investment officer at Plurimi Wealth.

“But I do think it’ll be a cut in March from the ECB.”

The Fed, meanwhile, left rates unchanged on Wednesday, with Chair Jerome Powell suggesting that rate hikes were likely done with due to easing inflation and that discussion of rate cuts was “coming into view.”

“The Fed has overtaken the ECB to be the markets’ favourite for which major central bank will cut first,” said Stuart Cole, chief macro economist at Equiti Capital.

The STOXX 600 has gained 12.7% year-to-date versus the U.S. benchmark S&P 500’s 22.6% during the same period.

France’s CAC-40 and Germany’s DAX also touched fresh all-time highs, up 1.2% and 0.6%, respectively.

The euro zone’s equity volatility index slid to its lowest level since 2020, reflecting market optimism.

Real estate stocks soared 5.8%, leading sectoral gains, while miners also jumped 3.3% tracking higher metal prices.

Separately, the Bank of England stuck to its guns and said interest rates needed to stay high for “an extended period”. UK’s benchmark FTSE 100 was up 1.6%, slipping from the day’s high.

Elsewhere, the Swiss National Bank held its rates and lowered inflation forecasts, while Norway’s central bank delivered a surprise rate hike.

Vivendi advanced 8% as the French media company plans to examine splitting up some of its activities.

AMS Osram jumped 12.7% after Jefferies upgraded the Swiss sensor maker to “buy” from “hold”.

Italian luxury group Brunello Cucinelli gained 5.7% after raising its 2023 revenue growth forecast again.

MorphoSys dropped 5.3% after the German biotech firm launched a 10% cash capital increase.

(Reporting by Ankika Biswas in Bengaluru; Editing by Dhanya Ann Thoppil, ,Janane Venkatraman and Sriraj Kalluvila)