By Susan Mathew and Sruthi Shankar
(Reuters) -Automakers and retail stocks on Friday led a rebound in European shares from a two-day rout that saw investors grapple with shifting expectations of U.S. interest rate hikes, a political crisis in Italy and recession risks.
Italian shares rose 1.8%, bouncing off 2-1/2 year lows hit in the previous session as investors awaited further developments in a political crisis brewing in the country.
Italian President Sergio Mattarella rejected Prime Minister Mario Draghi's resignation on Thursday and asked him to address parliament next week.
"There is not much out really to provide a solid reason for the rally. Maybe it is just a collection of smaller things: the fact that the Italian President rejected the offer from Draghi to resign (and) the latest commentary from the Fed suggesting rates will be raised by 'just' 75bps rather than the 100bps some were fearing," said Stuart Cole, head macro economist at Equiti Capital.
"The markets are so volatile at the moment that I would not suggest this is a shift in sentiment to something more positive."
The continent-wide STOXX 600 index ended 1.8% higher after falling 2.6% in the last two sessions on worries that the U.S. Federal Reserve may hike interest rates by a bigger-than-expected 100 basis points later this month.
But worries eased a bit after two of the Fed's most hawkish policymakers said overnight they favoured another 75-basis-point (bps) hike.
Aggressive steps by major central banks to battle surging inflation have left investors worried about a possible global recession. Grim economic growth out of China on Friday due to a hit from COVID-19 lockdowns also added to worries.
The STOXX 600 fell 0.8% this week against the backdrop of fears of an energy supply crunch due to the Russia-Ukraine war.
The critical Nord Stream 1 gas pipeline to Germany from Russia is planned to reopen on July 21 after closing for maintenance this week.
Meanwhile, the European Central Bank is also widely expected to hike rates by 25 bps next week, though analysts have started to price in a small chance of a 50-bps hike in the wake of a worsening outlook for euro against the dollar .
Among stock based news, Volkswagen gained 3.5% after its China unit stuck to goal of doubling sales of its ID series of electric vehicles this year despite COVID-19 disruptions.
Shares of other automakers Mercedes-Benz, Porsche Automobil, Renault climbed between 4.3% and 6.9%.
Richemont and Burberry fell 2.9% and 3.8% after the luxury retailers laid bare the damage to sales inflicted by China's strict lockdowns, renewing concerns about the outlook for the world's top luxury goods market.
(Reporting by Susan Mathew, Devik Jain and Sruthi Shankar in Bengaluru; Editing by Rashmi Aich, Arun Koyyur, William Maclean)