Banks drag European shares down as c.banks join Fed in raising rates

By Sruthi Shankar and Bansari Mayur Kamdar

(Reuters) - European equities inched down on Thursday with banks leading declines after the Bank of England followed the U.S. Federal Reserve and the Swiss National Bank in hiking rates amid worries of a banking contagion.

The continent-wide STOXX 600 index slipped 0.2% after closing at its highest level in more than a week on Wednesday.

U.S. stock indexes rallied following a turbulent session on Wall Street where the Fed lifted its interest rate by a widely expected 25 basis points and signalled that they are unlikely to climb much higher.

"The market is still pricing more than two rate cuts by year-end. We doubt this pricing can really stand against sticky inflation, growth in the US, but also in Europe and China actually reaccelerating," said Max Kettner, chief multi-asset strategist at HSBC Global Research.

The Swiss National Bank raised its benchmark interest rate by 50 basis and Norway's central bank hiked by 25 basis points, both in line with market expectations.

The Bank of England, meanwhile, raised interest rates by a further quarter of a percentage point and said it expected the surge in British inflation to cool faster than before.

UK's exporter-heavy FTSE 100 index slid 0.9% as pound rallied against the dollar after the BoE decision.

Further weighing on the mood, U.S. Treasury Secretary Janet Yellen told lawmakers that she had not considered or discussed "blanket insurance" to banking deposits after the failure of two U.S. mid-sized lenders earlier this month.

European banks fell 2.4% after a tentative rebound earlier this week when UBS Group agreed to buy embattled Swiss lender Credit Suisse in a $3 billion rescue deal.

The index is down about 15% so far in March and set for its worst monthly showing in three years when the onset of COVID-19 pandemic fuelled a sharp global selloff.

Citigroup downgraded the sector, warning the rapid pace of interest rate hikes would further weigh on economic activity and lenders' profits.

(Graphic: Turmoil in European Banks - https://fingfx.thomsonreuters.com/gfx/mkt/klvygqbewvg/European%20Banks.PNG)

"We've got a market that's been chopping around a fair bit," said Gerry Fowler, head of European equity strategy at UBS.

"There are definitely investors who have lingering concerns that rate hikes that are supporting the profit recovery for banks may be curtailed by the tightening in financial conditions, that their profitability is going to be a little more impaired because they have to pay higher deposit rates to maintain their deposit bases."

Among single stocks, Sanofi rose 5.5% after the French drugmaker said its asthma and eczema drug Dupixent, jointly developed with Regeneron, met all targets in a trial to treat "smoker's lung".

Dutch tech investor Prosus climbed 6.4% after Chinese video-game company Tencent said it would restrict its focus to its core business, while maintaining cost-cutting and improving efficiencies.

The broader technology index gained 2.2%, limiting losses on the broader index.

Sweden-based bank Svenska Handelsbanken AB fell 11.1% on trading ex-dividend.

(Reporting by Sruthi Shankar and Bansari Mayur Kamdar in Bengaluru; Editing by Subhranshu Sahu, Vinay Dwivedi and Angus MacSwan)