European and Asian stocks retreated on Tuesday as investors awaited key US inflation data later this week that could influence the Federal Reserve’s interest rate policy. Meanwhile, commodity-linked stocks fell amid declining oil prices.
European Shares Slip Ahead of CPI Report
European shares edged lower in early trading, trimming gains from the previous session. The pan-European STOXX 600 slipped 0.1%. [1]
Germany’s DAX lost 0.2% after data showed German exports posted their biggest drop in more than a year in November.
Miners fell 1.2% as London copper prices touched a six-week low on concerns over demand from top consumer China. [2]
Oil companies also declined, with BP down 0.8% and Shell losing 0.6% as crude prices extended declines. [3]
“The downside seen in commodities and commodity stocks suggest the market expects the Fed to keep rates high for longer than previously thought,” said Victoria Scholar, head of investment at Interactive Investor.
Travel stocks fell after Deutsche Lufthansa said it has seen no recovery in premium bookings. The German carrier dropped 3.5%, while Air France-KLM and IAG lost over 2% each. [4]
Asian Benchmarks Mixed
Asian share markets were mixed in early trade as Taiwan equities retreated after President Tsai Ing-wen resigned as party leader following losses in local elections. [5]
Japan’s Nikkei gained 0.8%, extending gains for a third day as domestic earnings season headed into full swing. [6]
But South Korea’s Kospi index gave up gains to inch 0.1% lower. Chinese blue chips also slipped 0.1%. [7]
All Eyes on US Inflation Report
The moves follow an upbeat session on Wall Street overnight, but volumes are expected to be thin as investors await US inflation data on Thursday that could influence the Fed’s rate hike plans. [8]
“The next big event will be the US CPI release, where the pace of slowdown will be key,” said Yeap Jun Rong, market analyst at IG. “Another benign reading could spur expectations that the Fed may near its last few hikes, providing optimism to the general market sentiment.”
Economists forecast the headline consumer price index for December will come in at 6.5% year-on-year, from 7.1% in November. Core inflation is seen easing to 5.7% from 6% previously. [9]
Investors will scrutinize the inflation report after surprisingly strong US labor and services sector data recently stoked fears of more Fed hikes.
Markets currently expect rates to peak just under 5% in June and start falling later in 2023. [10]
Rate Path Uncertainty Weighs on Sentiment
European shares ended lower in the previous session as ECB governing council member Gabriel Makhlouf said interest rates still have some way to rise.
The downbeat comments doused investor hopes for an imminent end to aggressive tightening. [11]
Germany’s benchmark 10-year Bund yield rose to 2.14%, coming off last week’s 3-month lows. [12]
Two-year German yields, more sensitive to interest rate expectations, climbed to 2.66%. [13]
Across the Atlantic, fed fund futures imply nearly 90% odds of a 25bps hike at the February policy meeting to a target range of 4.5-4.75%. However, a final peak above 5% is still priced in for May or June. [14]
Commodity Stocks Under Pressure
Falling commodity prices also weighed on markets ahead of the key US inflation data.
Oil extended losses with Brent crude down 56 cents to $79.35 a barrel, while US crude fell 61 cents to $74.25 on concerns over demand. [15]
Mining and natural resource companies were among the biggest sector decliners as copper prices slipped on a firmer dollar and continuing worries over demand in key consumer China. [16]
The Bloomberg Commodity Spot Index fell as much as 0.5% to the lowest level in almost four weeks, before paring some losses. [17]
Outlook for 2023
Despite recent volatility, European stocks are poised to post their best annual performance since the pandemic recovery of 2021. The STOXX 600 is on track to gain about 10% for the year after slumping 14% in 2022. [18]
The Euro STOXX is also up over 10% for 2023 so far, spurred by investor bets that major central banks are entering the final phase of interest rate hikes as inflation shows signs of cooling. [19]
Sentiment has markedly improved from the second half of 2022 when aggressive tightening sparked recession fears. However, the trajectory of rates, inflation and economic growth remains highly uncertain.
With macro headwinds persisting, equity returns are still forecast to be more muted relative to the stellar rebound from pandemic lows. Analysts expect mid-single digit percentage gains for European shares in 2023. [20]
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