UPDATE 2-European stocks rallied by banks, commodities stocks ahead of the Fed

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*Fed minutes due later today

* Commodity stocks, banks among biggest boosts

* German consumer sentiment rose in June (adds comment, updates pricing throughout)

By Susan Mathew

May 25 (Reuters) – European stocks rose on Wednesday, lifted by resource-related stocks and banks, as investors watched central banks’ updates on monetary policy tightening amid growing fears of a economic downturn.

The pan-European STOXX 600 index rose 0.6%. Banks, which are benefiting from rising interest rates, rose 1.1% to a new one-month high and were among the biggest risers in the index.

The focus will be on the minutes of the previous US Federal Reserve meeting, scheduled for later in the day, to gauge policymakers’ thinking on the path to interest rate hikes.

European Central Bank President Christine Lagarde has won key allies for her plan to raise rates out of negative territory this summer, although one of her own board members has expressed some skepticism about the political path to follow.

“Investors are constantly reassessing the odds of continued tightening from the Fed and other central banks,” said Andrea Cicione, chief strategy officer at TS Lombard.

“What will happen is that the Fed remains committed to normalizing monetary policy. After reaching what it thinks is a neutral policy, which could be in the 3% range, it will reassess. The minutes will confirm that, for now, the Fed is not blinking.”

Asian stocks and Wall Street also rebounded after a massive sell-off in the previous session. Markets tumbled this week, with the STOXX 600 index losing 1.1% in the previous session to give up almost all of Monday’s gains.

“The current tragedy of war in Ukraine, rising inflation and the corresponding central bank policy response have increased risk to equity markets and turned clients away from investments,” said Emma Wall, head of the investment analysis and research at Hargreaves Lansdown.

Wall added that day-to-day market volatility is likely to persist and portfolio diversification is the best way to navigate the tides.

Energy and materials stocks were among the biggest gainers in Europe. Oil prices rose, supported by tight supplies and the prospect of growing demand from the upcoming start of the U.S. summer driving season.

Meanwhile, the utilities sector rose 2.0% as power producers recovered from a plunge spurred by concerns over a windfall tax.

Electricity company SSE Plc gained 5.7% after announcing a 23% increase in annual profit.

A survey on Wednesday showed German consumer sentiment expected to pick up in June, but warned of inflation holding back household spending. This follows data on Tuesday which showed the resilience of eurozone business growth amid a slowdown.

Separate data from Germany showed Europe’s biggest economy grew in the first quarter, dodging a recession.

Swedish medical equipment maker Elekta gained 3.0% on a pace of profits. (Reporting by Susan Mathew and Shreyashi Sanyal in Bengaluru Editing by Sriraj Kalluvila and Matthew Lewis)

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