European shares drop ahead of cenbank meet

European shares dropped on Tuesday as investors feared another round of interest rate hikes by major central banks this week, while shares of Italian bank UniCredit jumped after a profit beat.

The pan-European STOXX 600 (.STOXX) was down 0.6% at 0917 GMT, but on track to end January on a positive note, buoyed by hopes of better-than-feared corporate earnings and economic resilience.

German arms maker Rheinmetall AG (RHMG.DE), which dropped 6.2% following the launch of a convertible bond offering, was the biggest drag among industrials (.SXNP), while Novo Nordisk AS (NOVOb.CO) and AstraZeneca PLc (AZN.L) pulled down the healthcare sector (.SXDP), reported Reuters.

The US Federal Reserve will kick off its two-day meeting on Tuesday and is widely expected to raise its policy rate by 25 basis points to 4.50%-4.75%.

Meanwhile, the European Central Bank and the Bank of England would likely raise rates by 50 bps each to 2.50% and 4%, respectively, on Thursday.

“What markets will be looking at is any rhetoric around where interest rates go from here -- if the central bankers suggest that inflation remains a major concern and that rates will need to continue to go even higher for longer,” said Victoria Scholar, head of investment at Interactive Investor.

Investors will keep a close watch on the crucial euro zone inflation data due a day before the ECB’s meeting, which will only include an estimate for Germany after the bloc’s biggest country delayed the release of its own figures.

UniCredit (CRDI.MI) jumped 8.4% to the top of STOXX 600 after pledging to return 5.25 billion euros ($5.69 billion) to investors based on its 2022 results, following its best profit in more than a decade.

Even after beating fourth-quarter profit estimates, UBS Group AG (UBSG.S) fell 3.6% after the world’s largest wealth manager predicted an “uncertain” year ahead.

“Rising interest rate environment, which boosts net interest incomes for banks, has helped the financial sector and that’s why we’re seeing these profit beats,” Scholar added.

On the other hand, Stora Enso (STERV.HE) fell 3.0% following a decline in the forestry group’s quarterly profit and warnings of a margin squeeze.

STOXX 600 companies’ earnings are expected to increase around 10% in the fourth quarter, down from 14.5% seen at January start, Refinitiv data showed. Fifty six STOXX 600 companies are expected to detail earnings this week.