European shares slip on sticky inflation fears, but still end Feb higher

By Shreyashi Sanyal and Bansari Mayur Kamdar

(Reuters) - European shares slipped on Tuesday after data from France and Spain pointed to inflation being stickier than feared, but still ended their second straight month higher supported by sharp gains in rate-sensitive banking stocks.

The continent-wide STOXX 600 index slipped 0.3%, after closing sharply higher in the previous session.

"Whether it be Spain, France or Germany, the European Central Bank has to basically take into account stickier inflation because you're talking about three out of four of the biggest economies in Europe," said Michael Hewson, chief market analyst at CMC Markets UK.

Higher food prices pushed the 12-month inflation rate in France to 7.2% in February from 7.0% in the preceding month.

In Spain, consumer prices rose 6.1% year-on-year in February, over a 5.9% rise in the 12 months to January.

Investors are expecting the ECB to hike interest rates by 50 basis points in its upcoming March meeting, taking the benchmark rate to 3%. Rates are expected to hit a peak of 4% in July.

All eyes are now on preliminary euro area wide consumer price inflation data for February due on Thursday.

Also pressuring European stocks was a rise in euro zone government bond yields, with the yield on Germany's 10-year bond, the bloc's benchmark, hitting its highest level since 2011. [GVD/EUR]

Graphic: Bonds swing from one direction to another https://www.reuters.com/graphics/GLOBAL-MARKETS/movakqqbava/chart_eikon.jpg

Banks, that tend to benefit from a high-rate environment, rose 1.4% and briefly hit their highest level since 2018, also helping keep Spain's lender-heavy IBEX index above water.

"Given that inflation is proving stubborn despite some signs of slowing down and the ECB is forecast to continue on its tightening cycle until at least the summer, we are likely to see significantly higher net interest income for European banks as we head through 2023," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Graphic: Banks lift European stocks higher https://fingfx.thomsonreuters.com/gfx/mkt/jnpwyaaqmpw/BanksSTOXX600.PNG

The broader STOXX 600 index clocked its worst weekly decline this year on Friday, driven by worries that central banks in the U.S. and euro zone would raise interest rates to tackle stubborn inflation.

The index still logged its fourth positive month in five, ending February 1.7% higher.

Spanish pharmaceutical company Grifols' shares dropped 9.1% after its 2023 outlook disappointed analysts, who were looking for a better recovery in margins.

Bayer fell 3.9% after the agriculture and healthcare company said operating earnings would likely decline in 2023.

The healthcare index closed 1.5% lower, weighing on Europe's STOXX 600.

Swedish heating technology specialist Nibe Industrier slid 7.6% after it said it is in the process of considering a potential acquisition of all or a majority of Japan's Fujitsu General Ltd.

Ocado sank 12.2%, to the bottom of the STOXX 600, after the online supermarket and technology group reported a worse-than-expected full-year loss.

(Reporting by Johann M Cherian, Shreyashi Sanyal and Bansari Mayur Kamdar in Bengaluru; editing by Eileen Soreng, Nivedita Bhattacharjee and Toby Chopra)