European shares fall as interest rate uncertainty dampens sentiment

By Shashwat Chauhan, Amruta Khandekar and Shristi Achar A

(Reuters) -European shares fell on Friday as concerns that global interest rates could stay elevated for longer took centre stage, while UBS shares jumped after the Swiss lender ended a state guarantee granted for its takeover of Credit Suisse.

The pan-European STOXX 600 dropped 1.1%, with rate-sensitive technology and real estate stocks leading the decline, down about 2.1% each.

All the main regional markets fell, with the UK's FTSE 100 down 1.2% after data showing the economy eked out some unexpected growth in the second quarter fanned fears of more rate hikes from the Bank of England.

Wall Street's main indexes also fell after hotter-than-expected U.S. July producer price data, after a modest increase in consumer price inflation briefly lifted the market in the previous session [.N].

U.S. and European bond yields continued to rise, adding to pressure on equities [US/] [GVD/EUR].

“The inflation number was in line but remained above the target. So I will not say the number will be a big game changer (in terms of) the road for central banks,” said Roland Kaloyan, head of European equity strategy at Societe Generale (OTC:SCGLY).

“The view is that we should not see a (U.S.) rate cut because the job market remains strong and inflation is still higher than the target from the Fed."

While the Fed is expected to pause its aggressive monetary tightening cycle, investors are concerned about the likelihood of slowing global economic growth and the possibility of further rate rises from the European Central Bank.

The benchmark STOXX 600 was flat on the week, as upbeat earnings were countered by a rout in European banks earlier this week following Italy's shock decision to hit banks with a windfall tax.

All major sectors were in the red, with basic resources down 1.7% for its biggest weekly decline in seven, as metal prices came under pressure after weak Chinese economic data fed into concerns about slowing demand in the world's top metals consumer.

Among risers, Switzerland's biggest bank UBS added 4.7% after it said it won't need the government guarantee it secured to rescue failing rival Credit Suisse.

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German IT firm Bechtle was up 6.4% after reporting better-than-expected second-quarter results.

Shares of luxury giants such as LVMH and Richemont, which had posted robust gains in the previous session, fell 1.7% and 2.8% respectively, further dragging on the benchmark index.