European shares rise after heavy weekly decline for global stocks

European equity markets rose on Monday following the sharpest weekly decline for global stocks since the pandemic-driven ructions of March 2020.

The regional Stoxx 600 share index closed almost 1 per cent higher and London’s FTSE 100 gained 1.5 per cent, helped by in energy producers rising after declines driven by economic growth worries.

Shell, a weighty constituent of the UK blue-chip index, added 3.3 per cent after dropping almost 13 per cent in the week to June 17.

Sean Darby, strategist at Jefferies, warned investors not to expect much long-term respite for European stock markets, however, with interest rates “set to climb” as “growth subsides” — a situation he described as a “perfect macro storm”. The Stoxx has dropped almost 17 per cent so far this year.

The FTSE All-World index, a gauge of emerging and developed market equities, fell by the most since March 2020 last week, with a 5.7 per cent decline. US equities also suffered their heaviest weekly loss since the outbreak of the coronavirus pandemic.

The declines were driven by an interest rates gloomy global market outlook, as the Bank of England and the Swiss National Bank followed the US Federal Reserve in raising interest to tackle soaring inflation.

Investors also expect listed companies’ earnings to fall because of higher consumer and producer prices and weaker consumer spending. Wall Street’s S&P 500 ended last week almost 25 per cent below its January high.

“I think we are in between two corrections on global stocks,” said Francesco Sandrini, head of multi-asset strategies at Amundi.

“The first 20 per cent of the equity market collapse was because of uations,” he said, referring to how higher interest rates lower the net present value of companies’ future profits in investors’ models.

“We may see an additional 10 per cent [drop] related to earnings, reflecting continued inflation and because of the increased risk of recession,” he added.

Fed chair Jay Powell will testify to Congress on Wednesday and Thursday after the world’s most influential central raised bank its main interest rate by 0.75 percentage points last week — its first rise of such magnitude since 1994.

On Saturday, Fed governor Christopher Waller expressed support for another 0.75 percentage point rise in July, commenting that the central bank was “all in on re-establishing price stability.”

In debt markets, UK gilts came under pressure, with the yield on the 10-year bond rising 0.1 percentage points to 2.6 per cent. The instrument, which underpins loan and mortgage pricing, traded just below 1 per cent in early January.

The move came as Catherine Mann, a member of the Bank of England’s rate-setting committee, said the central bank should consider raising interest rates faster in order to counteract the inflationary effects of a weaker pound. Sterling is down 9 per cent against the dollar so far this year.

Economists polled by Reuters expect data due to be released on Wednesday to show UK inflation at 9.1 per cent in May year on year, from 9 per cent a month earlier.

Germany’s 10-year Bund yield added 0.09 percentage points to just under 1.75 per cent. A report last week showed that producer prices in the dominant eurozone economy increased by 33.6 per cent on an annual basis last month, compared with 33.5 per cent in April.

The euro gained 0.3 per cent against the dollar to $1.05, overcoming potential instability caused by French president Emmanuel Macron losing his majority in France’s National Assembly.

In Asia, Hong Kong’s Hang Seng index rose 0.4 per cent and Japan’s Nikkei 225 lost 0.7 per cent.

Additional reporting by Tommy Stubbington

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