European stocks were lower on Tuesday as rising eurozone inflation data raised investors’ concerns that the European Central Bank will increase interest rates this week.
The pan-European Stoxx 600 was down 0.2 per cent, with weakness in energy stocks and financials ahead of policy meetings at two of the world’s biggest central banks. Germany’s Dax was down 0.2 per cent, while the French Cac 40 fell 0.4 per cent.
The falls came after reports that eurozone inflation accelerated to 7 per cent in April, up from 6.9 per cent in the previous month, its first increase in half a year. The reading was slightly above the no-change forecast by economists polled by Reuters.
“This is a clear invitation for the ECB to continue hiking interest rates,” said Carsten Brzeski, chief eurozone economist at ING.
The ECB will make its decision on Thursday, with the market mainly pricing in a rise of 0.25 percentage points, from its current level of 3 per cent. Investors are also expecting further increases this year.
A separate survey data from the ECB showed that demand for loans from eurozone businesses had fallen at the fastest rate since the 2008 financial crisis.
Investors also grew more cautious in response to falling oil stocks such as BP and Total. BP shares dropped 5 per cent after the UK energy group announced that it was slowing the pace of its share buyback scheme.
Bank stocks declined following news on Monday that US regulators closed down First Republic and agreed to sell $93.5bn of its deposits and most assets to JPMorgan Chase. The Euro Stoxx Banks index lost 0.2 per cent.
“The US financial system has been ‘saved’,” said Michael Every, an analyst at Rabobank. “Again, stock and bondholders haven’t; again rich, uninsured depositors have; and Too Big To Fail banks are now even bigger and obviously even less allowed to fail.”
Contracts tracking Wall Street’s benchmark S&P 500 were down 0.1 per cent while those tracking the tech-heavy Nasdaq 100 were flat ahead of the New York open.
The FTSE 100 was flat, propped up by HSBC, which posted strong corporate earnings. HSBC shares rose 4.5 per cent.
The yield on interest rate sensitive two-year Treasuries was unchanged at 4 per cent, the day before the next scheduled meeting of the Federal Reserve, which is expected to raise interest rates by 0.25 percentage points to a range of 5 to 5.25 per cent.
As the Fed announces its interest rate decision, investors will also be paying attention to its forward guidance. “Setting aside the manner in which the Fed’s message is communicated or received, the big picture is that Wednesday’s hike is the last near-certain hike,” said Mike Zigmont, head of research and trading at Harvest Volatility Management.
A measure of the dollar against six other currencies fell 0.2 per cent.
Asian trading was mixed on Tuesday, with Hong Kong’s benchmark Hang Seng index rising 0.4 per cent and Japan’s Topix falling 0.12 per cent. Markets in China remained closed for Golden Week.