Euro zone shares hit near one-year high on hopes of rate hike pause

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Euro zone shares hit their highest level in nearly a year on Thursday, as hawkish messages from the European Central Bank (ECB) failed to derail investor hopes the global rate hiking cycle was close to an end.

A widely watched gauge of euro zone stocks closed up 1.8% at its highest since Feb. 18 last year, while the broader STOXX 600 index rose 1.4%.

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The ECB raised interest rates by 50 basis points on Thursday and explicitly signaled at least one more hike of the same magnitude next month after which it would evaluate the subsequent monetary policy path.

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The ECB struck a more hawkish note compared to commentary by the U.S. Federal Reserve and the Bank of England which was largely perceived as dovish.

However, analysts pointed out the ECB’s comments did not provide any new hawkish surprises and investors were still hopeful the hiking cycle would end soon, even after President Christine Lagarde pushed back against the narrative.

“Even with that attempt (by the ECB)at being very overtly hawkish and strong in their determination, the market is still not fully buying it,” said Craig Erlam, a senior market analyst at OANDA.

“It seems investors are determined that inflation is going to continue to fall in a significant and sustainable way that will allow for central banks to not pursue an as aggressive tightening cycle as they would like the markets to currently believe.”

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The Fed on Wednesday delivered a widely expected 25 basis point rate hike and while the U.S. central bank projected further tightening this year, investors took a dovish cue from remarks by Fed Chair Jerome Powell, who made repeated references to “disinflation.”

The Bank of England also signaled the tide was turning in Britain’s battle against high inflation.

The comments were a major boost to equity markets, which have rallied this year after being pummeled in 2022 by the central banks’ aggressive rate hikes.

London’s blue-chip FTSE 100 rose 0.8% while Germany’s DAX index jumped 2.2%.

Rate-sensitive real-estate stocks were the top gainers on the STOXX 600 on Thursday, up 6.8%, while technology stocks hit their highest since March.

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Banks, whose margins usually benefit from rising interest rates, tumbled from near one-year highs touched earlier in the session and were last down 0.7%.

Among companies reporting results, Microchips supplier Infineon gained 8.0% on lifting its full-year profit margin forecast.

French software maker Dassault Systemes rose 12.4% on a strong 2023 revenue growth forecast, while Spain’s Santander gained 5.7% on reporting an annual growth of 1% in fourth-quarter net profit.

(Reporting by Ankika Biswas and Amruta Khandekar in Bengaluru; additional reporting by Bansari Mayur Kamdar; Editing by Janane Venkatraman, Sriraj Kalluvila and Chris Reese)