By Shreyashi Sanyal and Bansari Mayur Kamdar
(Reuters) - Europe's STOXX 600 rose on Monday, supported by gains across all major sectors, rebounding from its biggest weekly drop of 2023 on fears of more U.S. and euro zone interest rate hikes.
The blue-chip index added 1.1% by close. The pan-European STOXX 600 index had lost 1.4% last week after hotter-than-expected U.S. inflation data fuelled bets that the Federal Reserve would keep raising rates.
Feeding the optimism, British Prime Minister Rishi Sunak struck a new deal with the European Union on post-Brexit trade rules for Northern Ireland. He said it would pave the way for a new chapter in London's relationship with the bloc.
"It does take away the prospect of a very nasty tail risk for UK assets – an EU/UK trade war," said Stefan Koopman, senior market economist at Rabobank.
A firmer sterling after Sunak's announcement, nonetheless, weighed on UK's FTSE 100, with the export-heavy index lagging regional peers.
All major euro area sector indexes ended the session higher, with 1.4%-1.8% gains in the riskier parts of the market, including oil & gas, technology and autos & auto parts.
Miners, among the biggest losers last week, bounced 0.9% as the dollar rally paused for a breather. Defensive sectors such as healthcare posted the smallest gains.
European retailers rose 2.0%, led by a 4.2% increase in shares of Hennes & Mauritz. Associated British Foods climbed 1.4% as the Primark owner raised its full-year financial outlook following a strong first-half performance.
"Retail stocks have had a tremendous run after they took a hammering last year and, at the moment, it seems as if consumer spending is probably proving more resilient than markets feared," said Russ Mould, investment director at AJ Bell.
Mould highlighted that consumer spending has been buttressed by gas prices coming down and help from government-support schemes across the single-currency bloc.
Headline price pressures in the eurozone have shown signs of easing recently but the European Central Bank is still expected to hike rates in March on worries that inflation could be stickier than markets were expecting.
Nonetheless, the STOXX 600 has outperformed the S&P 500 index so far this year, boosted by recent data showing an improving economic outlook and by China's reopening.
Commerzbank celebrated its return to Germany's DAX with a climb of 4.6%, from which the country's No. 2 lender was removed in 2018.
Dechra Pharmaceuticals tumbled 9.2%, to the bottom of the STOXX 600, as the veterinary drugs maker warned its full-year operating profit would be at the lower end of analysts' expectations.
Italy's UniCredit SpA added 4.6% on its inclusion to the Euro STOXX 50 index.
(Reporting by Shreyashi Sanyal, Johann M Cherian and Bansari Mayur Kamdar in Bengaluru; Editing by Dhanya Ann Thoppil, Savio D'Souza and David Gregorio)