European shares close at record high after softer US jobs data calms rate hike fears

By Johann M Cherian, Tharuniyaa Lakshmi ‌and Purvi Agarwal

July 2 (Reuters) - ​European shares ​edged higher on Thursday as gains across sectors countered a slide in AI-related stocks, while investors parsed through softer-than-expected U.S. jobs data.

The pan-European STOXX 600 index closed 1.4% higher at ‌a record peak.

U.S. job growth slowed more than expected in June and payroll gains ⁠for the prior two months were revised lower, pointing to a cooling labour market and prompting markets to dial back expectations for ‌a near-term rate hike from the ‌Fed.

Short-term interest-rate futures reflected about a 60% chance of an interest rate hike from the Federal Reserve, down from about 75% before the report as traders scaled back bets.

"The fundamental strength of the U.S. economy ​has prompted the Fed to adopt a more hawkish tone in recent weeks," Lindsay James, investment strategist at Quilter, said.

"With price pressures easing and policy uncertainty likely to remain a feature of this administration, ⁠there is a possibility that those hikes may not materialise."

Healthcare stocks led broader gains with a 3.3% rise. Drugmaker Bayer gained 8.9% after saying ​it was consolidating its U.S. Roundup business in a new unit called Ruveon, following a major legal victory that blocked thousands of state-court lawsuits that claimed its weedkiller ​causes cancer.

Consumer-facing sectors followed with personal and household goods, and ‌food and beverages rising 2% and 2.2% respectively. Defence stocks rallied with the broader aerospace and defence index up 3.1%.

The technology index fell 2.1%, the only sector in ⁠the red. Soitec dropped 4.2% and Aixtron shed about 10% to bottom the STOXX 600 as AI-linked stocks retreated after sharp losses in Asia and on Wall Street overnight.

"The question now is whether all the good news around that (AI) spending has ⁠already been priced into the suppliers. Those stocks have had a very strong run, that is why markets are starting to ​get a bit nervous," Daniel Coatsworth, investment analyst at AJ Bell, said.

Data on Wednesday showed euro zone inflation rose less than expected in June, while European Central Bank President Christine Lagarde said risks to inflation and economic growth were now more ‌balanced than a few weeks ago.

However, traders continue to expect the ECB to lift interest rates by at least another 25 basis points before the year ends, ‌LSEG-compiled data showed.

Sodexo rose 7.4% after the French food caterer raised its full-year organic revenue growth forecast, citing stronger-than-expected third-quarter ⁠performance.

Meanwhile, Goldman Sachs said the bigger drag ‌on European Union growth is losing ​market share to China rather than a widening trade deficit with the Asian country.

(Reporting by Johann M Cherian, Tharuniyaa Lakshmi and Purvi Agarwal in Bengaluru; Editing by Eileen Soreng and ‌Subhranshu Sahu)

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