European shares shrug off Fed, defensives lead gains

European shares shrugged off a weak start to the session to end higher on Thursday after the U.S. Federal Reserve signalled a March interest rate hike, with defensive sectors including healthcare and utilities leading the gains.

The pan-European STOXX 600 rose 0.7%, with most major regional markets reversing course to end the day higher. Healthcare, telecommunications and utilities rose nearly 2% each. "As a reaction to the Fed, European stock markets and U.S. index futures sold-off this morning, but the selling was short-lived as the fear that was running through the markets faded... bargain hunters stepped into the fold," David Madden, market analyst at Equiti Capital, said.

Equity markets were battered earlier in the session after the U.S. central bank also reaffirmed plans to end its bond purchases that month. A hawkish tilt from the Fed has kept financial markets on edge for most part of January, with the STOXX 600 heading for its worst month since October 2020. Banks, which tend to benefit from higher lending rates, gained 1.4%.

"The worst-case scenario would be persistently high inflation which forces the Fed to move faster on the rate front, economic growth numbers stall or disappoint, and at the same time, Russia-Ukraine tensions escalate," Credit Suisse global chief investment officer Michael Strobaek said. Powell's hawkish tone pushed U.S. Treasury yields higher as investors ramped up their rate hike bets. This was mirrored in euro zone money markets, which moved to price in two, 10 basis-point rate hikes from the European Central Bank.

Chipmaker STMicroelectronics gained 2.0% after announcing plans to double its investments this year buoyed by high demand that drove a quarterly earnings beat. German business software group SAP fell 6.0% after it said it has agreed to buy a majority stake in privately held U.S. fintech firm Taulia. While SAP did not disclose the deal price, SAP CEO Christian Klein said the value is less than $1 billion.

Deutsche Bank climbed 4.4% after making its biggest profit since 2011 last year, defying expectations for a loss in the fourth quarter. The company that owns the WeTransfer file service said it was cancelling its initial public offering on Amsterdam Euronext, citing market volatility. WeRock had planned a floatation that would have valued the company between 629 million euros and 716 million euros.