European shares rebound after downbeat January; UBS jumps on earnings

European shares rose on Tuesday, tracking upbeat global risk sentiment following a volatile January, with the biggest boost from Swiss lender UBS on strong fourth-quarter earnings.

The pan-European STOXX 600 rose 1.2% after January became its worst month since October 2020.

Financial stocks led gains on the benchmark, rising 2.5% and tracking their best day in nearly two months, after UBS posted its best annual profit since the global financial crisis, emboldening it to hike share buybacks and set more ambitious profit goals.

Switzerland’s biggest bank advanced 6.1% to hit a four-year-high.

Overnight, Wall Street closed higher after Assistant Secretary for Economic Policy Ben Harris said U.S. inflationary pressures should ease in 2022 on weaker demand for goods, easing supply bottlenecks and a receding pandemic.

“With no clear catalyst behind the improvement in market sentiment, and no clear change in the fundamental landscape, we believe that (the rebound) may be due to portfolio rebalancing…after a very turbulent month,” said Charalambos Pissouros, head of research at JFD Group.

Euro zone manufacturing activity accelerated last month as supply chain bottlenecks eased, although the improvement was not evenly spread across member countries and factories still faced high inflationary pressures, a survey showed.

Focus is now on European Central Bank decision on Thursday, where fears about a hawkish shift are growing on the heels of rising inflation.

Money markets are pricing in an 80% chance of a 25 basis points hike by October and more than a total probability of a 25 bps by December. [IRPR]

The ECB will likely lift interest rates much slower than the Fed, but we believe they will avoid pressing the hike button this year, Pissouros added.

Focus is also on the Bank of England, which is widely expected to raise rates on Thursday due to post-pandemic inflationary pressures.

The STOXX 600 lost 4% in January on worries over rising interest rates, inflationary pressures, and geopolitical tensions, but could see a brighter note over the next few weeks as fourth-quarter earnings offer cause for optimism, analysts say.

Among other stocks, a better-than-expected rise in fourth-quarter sales and earnings prompted HeidelbergCement (DE:HEIG) to release some results ahead of schedule on Monday. The German cement maker gained 3.2%.

Automaker Stellantis advanced 1.9%, after three union sources said the company could cut up to 1,400 jobs in France this year as it continued to adapt to a changing industry.