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By Shreyashi Sanyal

(Reuters) -European shares edged up on Thursday, lifted by Spanish lenders on a report that Madrid could modify a bank tax, while markets also showed some signs of recovery from a sharp selloff triggered by bets of aggressive interest rate hikes globally.

The index was up 0.4%, as of 0808 GMT, after slumping for two consecutive days, with European banks advancing nearly 2%. Euro zone banks jumped 2.5% to hit their highest levels since June 10.

Spanish banking stocks including Bankinter, Sabadell and Caixabank, rose nearly 5% each after a local media report stated that Madrid is keen to avoid conflicts with the European Central Bank and could modify a bank tax.

Lenders stand to gain the most from a higher interest rate environment, while Morgan Stanley (NYSE:) upgraded the banking sector to “overweight”, citing cheap valuations and resilient earnings.

Hot U.S. inflation data triggered a selloff across global equity markets earlier in the week, as it cemented views that the Federal Reserve will hike rates by yet another 75 basis points (bps) next week.

The European Central Bank raised its benchmark lending rate by a large 75 bps last week.

“We can see that banks have continued to outperform, whereas tech and growth stocks with high multiples have underperformed, which means the market is getting bullish about economic growth not being hampered,” said Sumit Kendurkar, a senior trader at Optiver in Amsterdam.

The ECB is just about catching-up with the Fed, which has an already aggressive tightening cycle in place from earlier this year. The STOXX 600 dropped about 14% so far this year, a smaller loss compared with a 17% slump in the .

Most sectors rose on Thursday, while defensive utilities led losses, indicating a risk-on mood in markets.

The abrupt stoppage of pipeline to Europe by Russia has raised concerns about a harsh winter for Europeans, with the gas-importing utilities sector bearing the brunt of the negative sentiment.

However, Germany’s Uniper rose 3.2% after the gas importer said the government might take a controlling stake in the company as it seeks further aid.

Sky-high inflation the euro zone has spurred a cost-of-living crisis in the bloc, also hammering discretionary spending.

H&M dipped 0.7% after the retailer posted lower-than-expected quarterly sales as shoppers tightened their belts amid soaring energy and food bills and as it struggled to compete with rival Zara.

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By Reuters