European Stocks See Cautious Rebound -- Update

By Josie Cox 

European shares rose tentatively Friday, with investors seemingly relieved that euro-zone inflation data at least matched expectations, even though disappointing German retail figures once again underscored the fragility of the region's recovery.

Rebounding marginally from a day-earlier drop, which was triggered by a sudden intensification of the Eastern European conflict, the Stoxx Europe 600 rose 0.1%, in line with France's CAC 40 and the U.K.'s FTSE.

Germany's DAX, meanwhile, edged 0.3% higher following a 1.1% slump on Thursday, even though figures showed retailers in July posted their biggest monthly fall in sales since January 2012.

Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ, admitted that the figures dealt a further blow to Europe's largest economy, but also suggested that the market may have already revised down their expectations, after GfK consumer confidence data on Wednesday revealed the largest drop in German economic expectations since the 1980s.

Elsewhere, figures Friday showed that consumer prices in the 18 countries using the euro rose by just 0.3% year-over-year in August, representing the smallest rise since late 2009. The figure, however, was in line with consensus expectations, helping the euro touch a day's high of $1.3195 against the U.S. dollar.

Late last week, European Central Bank President Mario Draghi hinted that the central bank could be preparing further stimulus, even raising the prospect of quantitative easing being employed, which sent the euro to an 11-month low against the dollar.

Economists later concluded, however, that the ECB is most likely to want to gauge the impact of its June measures and assess the take up of the targeted longer-term refinancing operation before taking further action.

Beyond the euro zone, investors kept one eye firmly on Russia, where the ruble fell to an all-time low against the U.S. dollar after Kiev said that Russian troops had entered eastern regions of Ukraine in support of pro-Russian rebels. Moscow, meanwhile, denied the claim that Russia now has a military presence in the neighboring country.

Soon after midnight on Friday, Russia's President Vladimir Putin issued a statement, urging rebels to cease fire and let Ukrainian troops get out of the blockade. Earlier this week, Mr. Putin told his Ukrainian counterpart Petro Poroshenko that it was "Ukraine's own internal business" to negotiate a truce with rebels.

At the market opening, the ruble briefly eased to 37.02 versus the dollar, losing 0.7% on the day. That took the ruble below its previous record of 37 per dollar, which it hit on the first trading day of March after the West had threatened to punish Moscow for its annexation of Crimea.

"The latest developments suggest a meaningful escalation of the Russia-Ukraine conflict," Barclays economists wrote in a note.

Mr. Halpenny at Bank of Tokyo-Mitsubishi UFJ, agreed that this would likely "have considerable consequences for the region and key parts of Europe."

Moscow's Micex was down 0.4% on the day while the dollar-traded RTS index lost 0.8%.

Back in company news, U.K. retailer Tesco PLC was the clear loser of the day, tumbling to the bottom of London's main index as well as the pan-European index after issuing its third profit warning in as many years.

The company, which is struggling against fierce competition in its key home market, also said it would slash its interim dividend and reduce capital expenditure. It said it now expects full-year trading profit in a range of GBP2.4 billion ($3.98 billion) to GBP2.5 billion, compared with analysts' expectations of GBP2.7 billion to GBP2.8 billion, according to the company.

"We think Tesco will also look at potentially exiting some international businesses," Citigroup analyst Pradeep Pratti wrote in a note.

At the other end of the spectrum, AstraZeneca PLC rose more than 2% to the top of the index on speculation the drug maker might be planning to resume previously aborted takeover talks with Pfizer Inc.

In commodities markets Brent crude oil added 0.3% to trade at $102.79 a barrel. Gold was steady on the day at $1,290.80 having climbed on Thursday due to investors valuing it as a safe harbor amid the seemingly intensifying conflict in Eastern Europe.

In the U.S., the S&P 500 was indicated opening 0.2% higher. Futures, however, don't necessarily reflect moves after the opening bell.

Andrey Ostroukh in Moscow contributed to this article

Write to Josie Cox at [e-mail]