Banks help European shares rise amid gas supply worries

[April 01, 2022]  By Susan Mathew

(Reuters) - European shares rose slightly after early sluggishness on Friday, as a rally in bank stocks helped outweigh worries about economic growth and inflation, with Europe facing a deadline to start paying for Russian gas in roubles.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, March 31, 2022. REUTERS/Staff

Russian President Vladimir Putin threatened to cut off gas supplies unless paid in local currency from April 1 — a move that could exacerbate an energy crunch in the continent as Russian gas imports account for about 40% of Europe's consumption.

The move comes as a response to Russia's increasing economic isolation following its invasion on Ukraine. Worries about the fallout from the war, compounded by likely central bank tightening to control surging inflation, saw the pan-European STOXX 600 index mark its first quarterly loss in two years last month.

The index on Friday rose 0.3%. Banks 1.1% with Spanish lender Santander firming 3.1% after reiterating its 2022 profitability target.

Given that not all Russian banks have been sanctioned, markets are calm on hopes that some compromise can be made for gas payments, said Dhaval Joshi, chief strategist at BCA Research.

"If this goes to the worst case where supplies are cut off, it's not good for Europe, end of story. Markets will sell-off."

Negotiations aimed at ending the five-week war were set to resume even as Ukraine braced for further attacks in the south and east.

Adding to worries were data sets on Friday that pointed to slowing activity in Asia as well as Europe.

"The key question for Q2, maybe even Q3, is when are we going to get the peak inflation," Joshi said. "Because once we get to a peak in inflation, that will take pressure off long bond yields and one of the headwinds for markets will start to disappear."

"But that will mean that the nature of the market will change – the long duration stocks will do better than short duration stocks. Banks, cyclicals and oil stocks which have performed well will reverse."

Technology stocks have been one of the worst performers last quarter on inflation worries, down 17%. They led declines on Friday too, down 0.5%.

In France, volatility could also stem from French presidential elections due this month. But analysts do not expect much of an impact as President Emmanuel Macron is widely expected to be re-elected.

Among individual stocks, French catering and food services group Sodexo fell 7.9% on narrowing its full-year organic revenue growth forecast, citing uncertainties due to COVID-19 and the war in Ukraine.

(Reporting by Susan Mathew in Bengaluru; Editing by Anil D'Silva and Uttaresh.V)

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