European shares on Friday rose slightly after sluggishness early in the day as a rally in bank stocks helped outweigh worries about economic growth and inflation, with Europe facing a deadline to start paying for Russian gas in rubles.
Russian President Vladimir Putin threatened to cut off gas supplies unless paid in local currency from Friday — a move that could exacerbate an energy crunch in the continent as Russian gas imports account for about 40 percent of Europe’s consumption.
The move comes as a response to Russia’s increasing economic isolation following its invasion on Ukraine.
The Russian government has so far stayed current on its debt obligations. JPMorgan Chase & Co on Thursday processed a nearly US$447 million payment for dollar debt due in 2030.
Another deadline is tomorrow.
Worries about the fallout from the war, compounded by likely central bank tightening to control surging inflation, saw the pan-European STOXX 600 mark its first quarterly loss in two years last month.
The index on Friday rose 0.3 percent. Banks gained 1.1 percent, with Spanish lender Santander firming 3.1 percent after reiterating its profitability target for this year.
Given that not all Russian banks have been sanctioned, markets are calm on hopes that some compromise can be made for gas payments, said Dhaval Joshi, lead strategist at BCA Research.
“If this goes to the worst case where supplies are cut off, it’s not good for Europe, end of story,” Joshi said. “Markets will sell-off.”
Negotiations aimed at ending the five-week war were set to resume even as Ukraine braced for further attacks in the south and east.
Adding to worries were data sets on Friday that pointed to slowing activity in Europe.
“The key question for Q2, maybe even Q3, is when are we going to get the peak inflation,” Joshi said. “Because once we get to a peak in inflation, that will take pressure off long bond yields and one of the headwinds for markets will start to disappear, but that will mean that the nature of the market will change — the long-duration stocks will do better than short duration stocks.”
“Banks, cyclicals and oil stocks which have performed well will reverse,” he said.
Technology stocks were one of the worst performers in the first quarter on inflation worries, down 17 percent.
They led declines on Friday, too, down 0.5 percent.
In France, volatility could also stem from French presidential elections this month.
However, analysts do not expect much of an impact, as French President Emmanuel Macron is widely expected to be re-elected.
Among individual stocks, French catering and food services group Sodexo fell 7.9 percent on narrowing its full-year organic revenue growth forecast, citing uncertainties due to the COVID-19 pandemic and the war in Ukraine.
Eurozone inflation surged by a record 7.5 percent last month.
Analysts said that inflation would put pressure on the European Central Bank (ECB), which has thus far been reluctant to lift interest rates.
“With eurozone inflation rising even further above the ECB’s forecast, and likely to remain very high for the rest of the year, we think it won’t be long before the Bank starts raising interest rates,” said Jack Allen-Reynolds at Capital Economics.
Additional reporting by AFP
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