European shares bounce back as government bond yields take breather

By Shubham Batra and Shashwat Chauhan

(Reuters) -European shares closed higher on Thursday as a drop in government bond yields offered some respite while investors awaited global data in the next few days that could offer more clues on where major central banks stand on monetary policy easing.

The pan-European STOXX 600 index closed 0.6% higher after falling in the last two sessions, hovering near a three-week low.

Government bond yields in the region edged lower, with the German 10-year bund last at 2.654%, though holding near a six-month high after a spike in the previous session following weak U.S. Treasury auctions and strong data that threw rate cuts in doubt.

Money markets currently see around 35 basis points of interest rate cuts by the U.S. Federal Reserve this year, while the European Central Bank is expected to deliver its first cut next week.

"The ECB looks all but guaranteed to deliver a 25bp cut ... as data have been more or less in line with its expectations and language from President Christine Lagarde and others on the Governing Council has firmed in recent week," economists at BNP Paribas said in a note.

"The well-signalled cut suggests the focus will be on the updated staff projections, any changes to the forward guidance, and any new information on either the pace of rate cuts or the eventual landing zone for policy rates."

Real estate led gains across the major STOXX 600 sectors with a 1.9% jump, while telecom stocks added 1.6%.

Technology shares bucked the trend to fall 0.7% as German software company SAP slipped 4.1% after U.S. peer Salesforce forecast second-quarter profit and revenue below estimates due to weak client spending on its cloud and enterprise business products.

Remarks from Irish Central Bank Governor Gabriel Makhlouf and Bank of England Governor Andrew Bailey will be on investors' radar later in the day, with key inflation readings from the U.S. and euro zone due on Friday.

Meanwhile, Spain's European Union harmonised inflation rate accelerated more than expected to 3.8% in the 12 months through May, from 3.4% in the period through April.

In the United States, data showed the economy grew more slowly in the first quarter than previously estimated, keeping the Fed on track to possibly begin cutting interest rates before the end of the year.

Among individual stocks, Nestle gained 3.3% as traders pointed to upbeat comments from CEO Ulf Mark Schneider at a fireside chat with J.P. Morgan.

UK's Auto Trader was the top gainer on the STOXX 600, rising 12.9% to a record high after the car retailer posted a rise in annual operating profit.

(Reporting by Shubham Batra, Sruthi Shankar and Shashwat Chauhan in Bengaluru; Editing by Sherry Jacob-Phillips and Susan Fenton)