European Shares Extend Gains on Rising Oil Prices and China Relief

On Tuesday, an improvement in risk appetite gave European shares a boost, as China eased some of its COVID-19 curbs and energy stocks also got a boost due to rising oil prices.

Boost for most sectors

The pan-European STOXX 600 index was able to record a gain of 0.3%, marking an increase for the third consecutive trading session. The gains of the benchmark index were tempered after US consumer confidence declined in June and also dragged down Wall Street.

There was a 2% gain in the gas and oil sector in Europe, as it looked unlikely that major producers like the United Arab Emirates and Saudi Arabia would be able to increase their output significantly. There was also a 0.9% gain in the London FTSE 100 index that also includes heavyweight oil producers, as it was leading gains amongst its peers in the region.

Health authorities in China said that overseas visitors would no longer have to quarantine for a period of seven days, along with an additional three days at home, as they were cutting down this time in half. This was the latest easing in COVID-19 curbs in China that had been taking a toll on the country’s economy. It gave rise to hopes of a revival in demand from the second biggest economy in the world as well as the leading metals consumer.

There was a 1.2% rise in the basic materials index, as base metals and iron ore rallied. The STOXX 600 got the biggest boost from Asia-exposed banks, such as Standard Chartered and HSBC. There was also an increase of 1.5% and 0.8% in Richemont and LVMH, as these luxury retailers earn a major portion of their revenue in China.

Analysis and expectations

Market analysts said that while Chinese news is certainly an improvement, it is important to note that it will take at least four to six months to determine if different economies are heading into a recession or not. This year, there has been a sharp sell-off in equity markets and investors have been left scrambling for making adjustments to their expectations regarding corporate profits and economic growth because of the aggressive hike in interest rates brought on by soaring inflation.

On Tuesday, HSBC said that there could be a drop of 6.4% to 8.5% in European equities in terms of earnings per share, even though estimates had predicted a rise of 11%. Next month, the European Central Bank (ECB) is scheduled to increase its interest rates, something it hasn’t done in over a decade. Christine Lagarde, the President of the ECB, said that the move would be gradual, but they were prepared to be decisive if required.

There was a 4% gain in France’s Valeo after it secured a contract with BMW for equipping the electric-vehicle platform of the German carmaker with innovative driving assistance systems. The euro continued to struggle to rise against the dollar, but the Sterling was doing significantly better in this regard, as it remained unfazed.