European shares close higher after ECB leaves rates unchanged

FRANKFURT: European stocks closed higher on Thursday after the European Central Bank held interest rates steady as expected, while investors cheered strong earnings from major banks and easing trade tensions with the United States.

The pan-European STOXX 600 index finished the session 0.2% higher, having earlier touched a six-week high.

Stocks pulled back from their peaks as investors recalibrated their expectations for future monetary easing after ECB President Christine Lagarde said policymakers were more keen on the outlook on trade and its impact on the economy before deciding on further interest rate cuts.

Interest rate futures markets reflected this shift in sentiment, with traders scaling back bets on a September rate cut. The yield on the 2-year German bond also spiked, and weighed on equity markets.

“At 2%, rates remain squarely to the middle of the ECB’s 1.5% to 2.5% neutral range. Uncertainty is highly elevated, however, and, if trade tensions escalate, further easing may well be required later in the year to help support business and consumer confidence,” said Marchel Alexandrovich, an economist at Saltmarsh Economics.

The central bank’s cautious stance comes as eurozone inflation has returned to the ECB’s 2% target alongside signs of economic resilience.

Still, sentiment was largely buoyant on expectations of a US-EU trade deal after the European Commission said that an agreement was within reach, where tariffs on European exports to the US would likely settle down at 15% from a harsher 30% levy planned from August 1.

In a busy day for corporate results, banks were in a bright spot after second-quarter profit beats from Deutsche Bank and BNP Paribas.

German lender Deutsche Bank jumped 9.1%, while French bank BNP Paribas added 0.4% after a near 3% jump earlier in the day. The eurozone banks index touched its highest since 2008.

Reckitt raised its annual revenue forecast after the consumer goods company’s second-quarter net sales growth topped expectations, sending shares soaring 10%.

Cooling trade tensions have lifted the STOXX 600 about 18% from its lows in April after US President Donald Trump slapped steep tariffs on its trading partners. The index still remains about 2% away from its March historic high.