European stocks rise on hopes of Fed pause; eyes on ECB meeting

European shares rose on Monday on hopes the Federal Reserve could slow its pace of interest rate hikes, while investors welcomed Rishi Sunak's victory in Britain's prime ministerial race and looked ahead to a key rate decision from the European Central Bank. The continent-wide STOXX 600 index closed 1.4% up at its highest level in nearly a week, with utilities, media and travel and leisure sectors leading the gains.

Wall Street's main indexes rallied on Friday after a report said the Fed would likely debate a smaller rate hike in December. "While it is encouraging that Fed officials have started to point to an end in sight for rate rises, such a pause will remain conditional on a fading inflation and a cooling labour market. This has yet to be seen in the data," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

"We believe the full effects of restrictive monetary policy for the economy and corporate profits are not yet well reflected in consensus forecasts – leading to potential disappointments ahead." Further boosting sentiment, Sunak looked set to become the Britain's next prime minister after he won the race to lead the Conservative Party, which analysts said had relieved some of the nervousness around the outlook for the UK economy. Britain's blue-chip FTSE 100 rose 0.6%, while gilts jumped.

"Time will tell how this plays out in the medium to longer term, but in the short run the rapid decision on Sunak is one the market seems to be applauding. At least we've checked that box and can move on to other things to be concerned about," said Art Hogan, chief market strategist at B. Riley Wealth in New York. A survey showed euro zone business activity contracted at the fastest pace in nearly two years in October as the cost of living crisis kept consumers cautious and sapped demand.

Focus this week will be on the European Central Bank's policy meeting where it is likely to hike interest rates by another jumbo 75 basis points as it tries to contain inflation running at five times its target, a Reuters poll found. Among individual stocks, Dutch technology investor Prosus tumbled 17.3%, tracking weakness in Hong Kong tech giants, after Chinese President Xi Jinping's newly unveiled leadership team heightened fears that economic growth might be sacrificed for ideology-driven policies.

Asia-focussed insurer Prudential Plc slid 9.3%, while banks HSBC and Standard Chartered fell about 0.6% and 1% respectively. Philips dipped 1.5% after the Dutch medical equipment maker said it expected to scrap around 4,000 jobs and warned supply chain problems would continue to weigh on sales in the last months of 2022.