European stocks extend recovery as banking fears ebb

© Reuters. The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, March 27, 2023. REUTERS/Staff

By Sruthi Shankar

(Reuters) -European stocks rose for a second session on Tuesday, lifted by commodity and banking shares, after a buyout deal for failed Silicon Valley Bank raised hopes that the banking crisis would be contained.

The continent-wide index climbed 0.4%, extending its rebound after last week’s market rout caused by the collapse of Credit Suisse and two mid-sized U.S. lenders.

European banks rose 1.2%, adding to Monday’s 1.4% gain. Swiss bank UBS climbed 1.6% after CEO Ralph Hamers said the bank saw its government-orchestrated takeover of Credit Suisse as a growth opportunity, in an internal memo seen by Reuters. Credit Suisse shares rose 1.7%.

“You may get a bit of a relief rally. It’s no doubt that banks are cheap, but it’s not a sustained rally yet,” said Rupert Thompson, chief economist at Kingswood.

“Net interest margins, which so far have benefited from higher interest rates, are likely to come under pressure because you’ve got deposit outflows. And if we get a recession, the outlook for banks isn’t that great.”

Economically sensitive sectors such as oil & gas, miners and insurers were among the other top gainers in Europe.

Real estate stocks fell 1.4% to a five-and-a-half-month low. Citigroup (NYSE:) on Monday warned the potential downside for the sector could exceed 50% due to the spectre of a systemic credit event after recent bank failures.

Germany’s Aroundtown slumped 10% to a record low ahead of its results on Wednesday, as several traders were worried that the company could cancel its dividend.

While the STOXX 600 is set to end the March quarter with a near 5% gain on signs of economic resilience and hopes that major central banks were nearing the end of their monetary tightening cycles, banks were poised for a modest 1.3% rise.

The European banks index was on track for its worst monthly showing since March 2020, when financial markets were roiled by pandemic fears.

Telecom Italia (BIT:) added 1.6% after Bloomberg News reported that Italy’s state-backed lender was working on a higher bid for the company’s landline network.

Embracer tumbled 13.8% to the bottom of the STOXX 600 after the Swedish gaming group pushed back dates for expected completion of several deals announced last year.