European shares dip on rate jitters, banks rise

European shares dipped on Thursday as rate-sensitive technology shares slipped on expectations of further interest rate hikes by major central banks, although gains in banks helped limit losses. The pan-European STOXX 600 index (.STOXX) edged 0.1% lower, with the technology sector (.SX8P) down 1.2%. European bank shares (.SX7P) rose 0.6%.

Fears that the US Federal Reserve could opt for a hawkish stance in its meeting next week and expectations that the European Central Bank will continue to tighten its monetary policy weighed on stocks, reported Reuters.

This sentiment comes after the Bank of Canada hiked its overnight rate to a 22-year high of 4.75% on Wednesday and markets and analysts immediately forecast yet another increase next month. Italy (.FTMIB) and Spain’s (.IBEX) lender-heavy indexes rose about 0.4% each and were among early outperformers.

“The latest developments have also run against the prevailing narrative that central banks are on the verge of pausing their rate hikes, particularly given Canada was one of the first to formally signal a pause back in January,” Deutsche Bank strategists Jim Reid and Henry Allen wrote in a note.

“The big question now is whether the Fed might follow up with a hike of their own next Wednesday or whether they’ll finally keep rates on hold after 10 consecutive increases.”

Among other major central banks, the Reserve Bank of Australia (RBA) surprised markets by hiking in May and again this week, after pausing a nearly year-long tightening cycle in April.

Money market participants now see a 69% chance that the Fed will skip raising interest rates in its June meeting but will hike in July. For the ECB, traders see about a 97% chance of a 25 basis point rate hike next week.