(Bloomberg) -- Europe stocks rose as the European Central Bank took a softer approach than its U.S. counterpart in signaling monetary policy tightening, with investors also focusing on corporate earnings for cues on the outlook for growth.
The Stoxx Europe 600 Index closed 0.7% higher after the ECB kept interest rates unchanged, as expected, and renewed its pledge to end bond-buying in the coming months. It reaffirmed that “gradual” rate hikes will follow “some time after” halting net asset purchases.
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Travel and leisure shares were the biggest gainers, with Wizz Air Holdings Plc jumping on a narrower-than-expected loss, while consumer shares outperformed following better-than-expected sales at Hermes International. Technology stocks underperformed.
“I had anticipated a more hawkish tone given upside inflation outcomes and an absence of major escalation in the war in Ukraine, but madame Lagarde played today’s press conference with the straightest of bats,” said Andrew Mulliner, head of global aggregate strategies at Janus Henderson.
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The European equities benchmark is set to end the holiday-shortened week slightly lower amid mounting concerns around high inflation and supply chain disruptions from the war. The U.S. Federal Reserve started a rate-hike cycle last month and New York Fed President John Williams said today that speeding up the pace to include increments of a half-percentage point was now a “reasonable option.”
In Europe, it is unlikely that the ECB “will even hike rates in the third quarter,” according to Liberum Capital’s head of strategy, accounting and sustainability, Joachim Klement. “By then, the growth slowdown triggered by the war and high energy prices will already have become so obvious that the ECB will feel little pressure to hike interest rates,” he said.
ECB policy makers are forming a consensus around increasing interest rates in the third quarter of 2022 to tackle record inflation, according to people familiar with the matter.
Meanwhile, the first-quarter earnings season is underway. Profits are widely expected to beat estimates, although pressure on margins is likely to hurt growth in the coming quarters, according to Morgan Stanley strategists. With full-year profit estimates looking increasingly elevated, strategists led by Ross MacDonald “expect downgrades to accelerate over the coming months as margins are reset lower.”
Martin Moeller, co-head of Swiss and global portfolio management at Union Bancaire Privee, also expects consumer demand to start slowing amid surging prices. Elevated demand over the past 18 months has been driven by consumer subsidies -- “but this is a support to purchasing power that would otherwise have been lost out, rather than additional fuel like we saw last year,” he said on Bloomberg TV.
Among individual stocks, Ericsson AB slumped 5% after indicating it faces new fines related to its corruption scandal in Iraq. UPM-Kymmene Oyj tumbled as it said it had not been able to reach new collective labor agreements with the Paperworkers’ Union.
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