On Wednesday, European shares declined as the US inflation data turned out to be hotter than expected, raising bets of more aggressive action from the Federal Reserve. Moreover, it also added pressure on the European Central Bank (ECB) because there was a decline in the euro, as it reached parity with the US dollar.
Stock index falls
There was a 1% decline in the continent-wide European STOXX 600 index after data showed that inflation in June in the US had surged by 9.1%, making it the largest annual increase in forty years. This was after the cost of gasoline, rent and food remained stubbornly high.
The biggest sectors to lose in Europe were construction and materials and automobiles, as they suffered losses of 1.8% and 2.3%, respectively. Even though markets had already priced in an interest rate hike from the US Federal Reserve by 75 basis points, the data indicates that increases could be bigger.
Market economists said that there could be a 100 basis point increase possible, even if it is not the most ideal case. But, the rise in the CPI data is definitely worrying and could push the Fed into reconsidering its moves.
Euro falls
Since the US dollar rallied, the euro suffered a decline and it went below the $1 mark, which was a first in more than 20 years. This has put the ECB in a tough situation because it is scheduled for hiking interest rates in the next week in order to combat the soaring inflation that hit 8.6% recently.
The inflation problem will worsen due to currency exacerbation and the eurozone economy would come under more pressure due to hikes in the interest rates. It is already dealing with potential gas shortages, a possible recession, and high energy costs that are eating into the purchasing power.
European economy
Market analysts said that the chances of the eurozone economy going into recession are higher, as opposed to the US. They said that the equity valuations have already come down and are showing that earnings have fallen in Europe. Moreover, if the gas supply comes to a halt, investors should be prepared for a further downside of about 20%.
Therefore, it should be noted that the markets have not priced in any such scenario on what moves the ECB will likely make. In the year-to-date, there has already been a decline of 19.6% and 15.4% in the Euro zone blue-chips and STOXX 600 index, respectively. Now, investors are worried that growth will further be squeezed because of the interest rate hikes from the ECB.
As far as individual stocks are concerned, there was a 9.2% rise recorded in Orion. This was after the Finnish drug maker signed a deal with Merck and this collaboration helped it upgrade its future outlook. With the biggest gas pipeline closed for annual maintenance in Europe, there could be trouble for the economy if Russia decides to extend the shutdown, due to the war with Ukraine.
