European stocks stage tentative recovery as banks surge

European stocks rose on Tuesday, as the banking sector bounced back from a weeks-long rout, but the overall mood in the market was sombre after Moscow warned of cutting gas supplies to the continent.

The region-wide STOXX 600 index rose 0.8%, with banks gaining 3.6% after hitting a one-year low in the previous session. Utilities gained 3.2%.

European bourses including the German DAX and Italy’s FTSE MIB on Monday confirmed that they were in a bear market, or a decline of 20% or more from their record closing highs, due to the prospects of a ban on Russian oil imports.

Fears of a severe supply crunch sent crude prices soaring to $127 per barrel and fuelled concerns about inflation stifling economic growth. [O/R]

“In the absence of new negatives, the market may try to stabilise but it’s very much an ebb and flow between very depressed technicals and a highly uncertain situation in Ukraine,” said Emmanuel Cau, head of European equity strategy at Barclays (LON:BARC).

“We’re seeing a lot of moves in the market implying investors are positioning for stagflation risks.”

The STOXX 600 is down almost 14% so far this year, falling from record highs hit in January as the Ukraine crisis threatens to derail an economic recovery.

Russian Deputy Prime Minister Alexander Novak said the country could cut gas supplies via the existing Nord Stream 1 pipeline to Germany, but it has not made such a decision yet.

Shares in banks Raiffeisen, Societe Generale (PA:SOGN) and Unicredit (MI:CRDI) rose between 6.8% and 10.1% after getting hammered in the past weeks on concerns about their exposure to Russia as well as receding expectations of an interest rate hike from the European Central Bank.

Shares in Telecom Italia (MI:TLIT) jumped 10.4% after an Italian newspaper reported that U.S. fund KKR was still interested in a takeover deal, albeit at a lower price.

French food group Danone gained 0.8% after unveiling measures to ramp up revenue growth.

British insurer and asset manager M&G surge 12.8% after announcing a 500 million pound ($654.30 million) share buyback programme.