European shares rise but stubborn inflation data caps gains

By Johann M Cherian, Shreyashi Sanyal and Bansari Mayur Kamdar

(Reuters) -European shares rose on Thursday boosted by consumer staples and energy stocks, but data suggesting euro zone inflation remained stubbornly high bolstered fears of more European Central Bank rate rises.

The continent-wide STOXX 600 reversed early losses and closed 0.5% higher.

Energy stocks rose 1.4% supported by firm crude prices on signs of a strong economic rebound in top crude importer China.

A sharp weakness in sterling lifted UK's exporter-heavy FTSE 100 index up 0.4%.

London's internationally focussed consumer staples stocks such as Diageo and Unilever rose over 1% each, while the European food and beverage index added 1.8%.

"There's certainly the assumption that there is still mileage in the tank when it comes to price increases, that margins can be protected, the consumer is going to be resilient to a degree and these companies are still going be able to make money," said Danni Hewson, financial analyst at AJ Bell.

Meanwhile, consumer price inflation in the 20 countries sharing the euro currency rose 8.5% in February, compared with an increase of 8.6% a month earlier on lower energy prices, but the reading was still above 8.2% projected in a Reuters poll of economists.

While inflation was also lower than a double-digit peak hit in October, fears lingered that the earlier surge in energy prices has seeped into the economy via so-called second-round effects, making price growth even more difficult to root out.

"High inflation means more aggressive ECB rates, which means less conducive business conditions for European companies," said Giles Coghlan, chief market analyst at HYCM.

Earlier in the week, data from Spain, France and Germany indicated that inflation remained sticky and fed into fears that the ECB would remain hawkish for longer.

ECB Chief Christine Lagarde said price declines have not been stable and that rates will have to rise higher and stay higher for some time.

European markets ended the first two months of this year in gains — a first in four years — with banks adding 18% as lenders benefit from higher net interest income, a consequence of elevated borrowing costs.

Still, the global equity market momentum has stalled of late as investors price in steep prices and higher rates.

Irish stocks led gains among regional peers, up 2.1% after CRH surged 7.9% on posting better-than-expected results.

Europe's biggest lender, HSBC Holdings Plc slid 3.3% as it traded without the entitlement of a dividend. The bank sector index fell by 0.8%.

Credit Suisse tumbled 7.0% and hit a fresh record low following reports this week about talent leaving the beleaguered Swiss bank.

Flutter's 0.9% fell as it reported full-year core profit at the lower end of its guidance range.

(Reporting by Johann M Cherian and Shreyashi Sanyal in Bengaluru; editing by Eileen Soreng, Uttaresh Venkateshwaran, William Maclean)