The fragile optimism that had buoyed European markets has been shattered, as a nasty inflation surprise from the UK and a wave of caution from Wall Street converged to send stocks into a broad retreat on Wednesday.
The positive sentiment from this week’s Ukraine summit has evaporated, replaced by the stark reality of persistent price pressures and central bank uncertainty.
The pan-European Stoxx 600 was trading 0.3% lower in early London trading, with nearly all sectors and every major regional bourse flashing red.
The sell-off follows a listless session in Asia, which tracked declines on Wall Street, setting a tense and defensive tone for the day.
The inflation hangover: a nasty UK surprise
The primary catalyst for the morning’s downturn was a hotter-than-expected inflation report from the United Kingdom.
The data showed consumer prices surged 3.8% for the year to July, a significant acceleration that caught markets off guard.
The British pound briefly jumped against the dollar on the news before settling, while the FTSE 100 opened in the red, down around 0.1%.
According to Sanjay Raja, chief UK economist at Deutsche Bank, the surprise was likely a statistical anomaly, driven by the timing of data collection coinciding with school holidays.
“Prices for airfares and sea-fares tend to be more volatile later in July as demand picks up,” he said in a note, observing that “according to the ONS airfares were up a staggering 30% m/m – the highest monthly increase going back to 2001.”
While he argued this would likely unwind, he conceded “there’s more upward momentum left,” and that the “path to 2% CPI next year looks narrower.”
This, Raja added, leaves the Bank of England grappling with “an uncomfortable trade-off” between high inflation and a sluggish economy.
The price of peace: defense stocks extend their rout
While the inflation data was the new shock, the aftershocks of Tuesday’s diplomatic optimism continued to ripple through specific sectors.
European defense stocks, which had tumbled on the prospect of a Ukraine peace deal, extended their sharp losses.
The Stoxx Europe Aerospace and Defense index shed another 0.9% after having already fallen 2.6% in the previous session.
German contractors Rheinmetall and Hensoldt fell around 1.8% and 1.9% respectively, while Britain’s Rolls-Royce also dropped.
“Speculation about a diplomatic breakthrough meant that European assets saw some sizeable moves [on Tuesday],” noted Deutsche Bank’s Jim Reid. “Indeed, it was notable that defence stocks really struggled yesterday.”
The shadow of the Fed looms large
This potent mix of geopolitical shifts and European economic anxiety is all playing out under the long shadow of the US Federal Reserve.
Global sentiment is now firmly focused on two upcoming events: the release of the Fed’s July meeting minutes and the central bank’s annual symposium in Jackson Hole, Wyoming.
Investors are desperately awaiting clues from Fed Chair Jerome Powell, especially after minutes from the last meeting revealed the first two-official dissent since 1993.
Despite the growing uncertainty, traders are still clinging to hope, with the CME’s FedWatch tool indicating an 84.9% chance of a quarter-point rate cut in September.
That conviction, however, will be put to the ultimate test this week.
The post Europe markets open: Stoxx 600 falls 0.3% on UK inflation shock and Fed fears appeared first on Invezz