European shares rose for the third straight session on Monday, led by bond-proxy sectors, as investors looked to a near certain interest rate cut from the European Central Bank (ECB) later this week.

The pan-European STOXX 600 ended 0.3% higher on the first session of June, with Spanish and Italian stocks leading gains with 0.7% and 0.5% rises, respectively.

The sentiment was upbeat as global factory activity offered signs of recovery, while softer manufacturing data on the heels of a weak U.S. inflation print on Friday continued to spur hopes of interest rate cuts this year by the Federal Reserve.

All eyes are now on the ECB's interest rate decision on Thursday, where the central bank is expected to cut borrowing costs by 25 basis points (bps) from record-high levels, according to a Reuters poll.

"Falling inflation and 18 months of weak economic activity make the case for the ECB to start cutting rates. But we don’t think it will cut far and fast," BlackRock (NYSE:BLK) Investment Institute said in a note.

"This is not your typical rate cutting cycle. Central banks are set to keep rates above pre-pandemic levels due to persistent inflationary pressures – and last week's euro area inflation data again showed stalling inflation progress."

Market participants anticipate rate cuts owing to the encouraging signs of easing inflation in the region. However, the May inflation reading ticking higher has cast doubts on the number of rate cuts this year.

Euro-zone bond yields fell after data showed factory activity remained weak in the bloc and shrunk in the U.S. in May. That helped rate-sensitive real estate, telecoms and utilities, often considered as bond proxies, to lead sectoral gains.

Energy stocks were in a weak spot, slipping 0.7%, tracking a dip in oil prices. [O/R]

Among other stocks, British drugmaker GSK tumbled 9.2% after a Delaware judge allowed more than 70,000 lawsuits over discontinued heartburn drug Zantac to go forward. The stock weighed on the healthcare sector, sending it 0.3% lower.

Atos shed 18% as the distressed IT consulting firm gave itself until Wednesday to choose between two revised restructuring proposals that would dilute its current shareholders to almost nothing and massively cut its debt burden.

Source : Economy News by Reuters / Jun 3, 2024