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Europe Markets

April 23, 2018, 1:11 p.m. EDT

European stocks hit 10-week high as rising bond yields lift financial shares

Metro shares punished after profit warning

By Carla Mozee, MarketWatch


AFP/Getty Images
UBS shares lost ground Monday.

European stocks finished at their highest in more than 10 weeks Monday, with a turnaround in the market aided by gains for financial stocks as bond yields rose, moves that came ahead of this week’s European Central Bank meeting.

How markets moved

The Stoxx Europe 600 index (STOXX:XX:SXXP)  closed up 0.4% to 383.18, the best close since Feb. 2, according to FactSet data. Telecom, oil and gas and financial stocks led sector gainers, while utility, consumer goods and basic materials shares fell. The index on Friday ended fractionally lower, but ended last week up by 0.7%, a fourth consecutive weekly advance.

In Frankfurt, the DAX 30 index (XEX:DX:DAX)  ended up by 0.3% at 12,572.39, and in Paris, the CAC 40 index (PAR:FR:PX1)  picked up 0.5% to finish at 5,438.75.

Spain’s IBEX 35 (1058:XX:IBEX)  tacked on 0.4% to 9,922.00, and the U.K.’s FTSE 100 index (FTSE:UK:UKX)  closed up 0.4% to 7,398.87.

The euro (XTUP:EURUSD)  bought $1.2220, down from $1.2289 late Thursday in New York.

The yield on Germany’s 10-year bund (XTUP:BX:TMBMKDE-10Y)  rose 4 basis points to 0.63%, according to Tradeweb data.

What drove the market

European stocks swung higher during the session, with shares of bank and insurance companies bolstered by higher interest rates in the form of gains for eurozone bond yields. Those yields moved up as the U.S. 10-year Treasury yield (XTUP:BX:TMUBMUSD10Y)   edged toward the 3% level. The Stoxx Europe 600 Insurance Index (STOXX:XX:SXIP)  climbed 1% and the Stoxx Europe 600 Banks Index (STOXX:XX:SX7P)  bulked up by 0.7%.

“The recent rally in metal prices, and oil prices hitting fresh four-year highs have stoked fears that inflation in the U.S. will pick up sharply, raising interest rate-hike expectations,” said Fiona Cincotta, senior market analyst at City Index, in a note.

Investors continued to sort through corporate earnings reports, and did so Monday as preliminary manufacturing and services PMI reports from the eurozone, Germany and France largely beat expectations. But IHS Markit did say that the eurozone economy remains in a “lower gear” as business-activity expansion has marked signs of weaker demand growth and supply constraints.

The PMI data arrived after European Central Bank President Mario Draghi reportedly said on Friday that the region’s growth cycle may have peaked.

Investors will watch what Draghi and the ECB will say about continuing the bank’s quantitative easing measures when they release the next policy decision on Thursday.

Read: Signs of higher inflation are popping up everywhere

Also check out: Expect a careful, dovish Mario Draghi at next week’s ECB meeting

What strategists are saying

“With the language having changed at the latest meeting, the [ECB] is likely to stay on hold this Thursday. We expect a dovish tone, but not too dovish,” said Daniele Antonucci, an economist at Morgan Stanley, in a note. “The Governing Council is likely to say that the growth momentum is somewhat slower, but we doubt that it’ll be very concerned about this,given that it’s likely to see it in the context of a still robust pace of expansion. We think that the next shift in communication, on when and how QE will end, is likely to come at the June meeting.”

What data were in focus?

IHS Markit said it’s flash April reading for eurozone services activity was at 55.0, above a FactSet estimate of 54.8. The flash manufacturing PMI of 56.0 met expectations.

Stocks in focus

UBS (SWX:CH:UBSG)   (NYS:UBS)  fell 2.5%, but pared larger losses, even as the Swiss bank’s first-quarter earnings net profit rose 19%, supported by the performance of its wealth-management unit.

Rortork PLC (LON:UK:ROR)  jumped 10.9% as the maker of industrial flow-control equipment posted a 10% rise in first-quarter revenue and said it expects full-year revenue to increase on year despite a 5% currency headwind.

Metro AG (ETR:XE:B4B)  tumbled 9.3% in the wake of the German retailer’s 2018 profit warning issued Friday, citing underperformance in its Russian business. HSBC cut its rating on Metro to reduce from buy, and Commerzbank cut its rating to hold from buy.

“Two consecutive communication mishaps in less than one year after the demerger have left investors puzzled and confidence may have evaporated,” said Commerzbank analyst Juergen Elfers in a research note.

Royal Philips NV shares (AMS:NL:PHIA)   rose 5.5% as the Dutch technology company backed its target for the 2017-2020 years of 4%-6% comparable sales growth and an average annual 100 basis points improvement in adjusted Ebita margin.

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