By Anisha Sircar and Susan Mathew
(Reuters) -European shares broke a three-day losing streak on Wednesday as basic materials stocks surged 4.5%, while Russian energy giant Gazprom (MCX:GAZP) halting gas supplies to Bulgaria and Poland and a plunge in German consumer morale kept gains in check.
Exacerbating an energy crunch in Europe, Gazprom halted gas supplies to Bulgaria and Poland for failing to pay for gas in roubles in the Kremlin's toughest response so far to crippling sanctions from the West.
"The Russian gas export developments out of Europe are a reminder of the potential for an escalation of the war... (and)looms over this market in the near term," said Mark Haefele, Chief Investment Officer, UBS Global Wealth Management.
"However, Europe still has many diplomatic and fiscal policy responses available to prevent an energy induced recession and based on current information, a European recession is not our base case."
The pan-European STOXX 600 rose 0.7% after having hit six-week lows at the open. Miners and oil stocks extended gains for a second straight day, with the former on course to make back all of Monday's 6% plunge.
German shares, which underperformed through the session, rallied at close. Deutsche Bank (ETR:DBKGn)'s 5.6% slide after warning that the Russia-Ukraine conflict could hurt full-year results, capped gains.
A survey showed German consumer morale is set to plunge to a historic low in May as the conflict in Ukraine leads to soaring costs and dashes hopes of a post-pandemic recovery.
"With so many stumbling blocks in the coming weeks, uncertainty and volatility will remain elevated with the potential for lagging FX and equity volatility to gain momentum," strategists at TS Lombard warned.
Concerns around slowing economic growth, inflation and the events in Ukraine, coupled with the prospect of aggressive monetary policy tightening by major central banks have sapped risk appetite, putting the benchmark STOXX 600 index on track to end the month about 3% lower despite some upbeat earnings.
First-quarter earnings for companies listed on the STOXX 600 are expected to increase 27.1% over the same period last year, according to Refinitiv estimates. Of the 37 companies that reported results as of Tuesday, 62.2% have exceeded analyst estimates, per Refinitiv data.
Mercedes-Benz and HelloFresh rose on upbeat earnings, while industrial software company Aveva dropped 15.9% to the bottom of STOXX 600 after it said sanctions on Russia would hit its operating profit this year.