Recession Fears Keep European Shares Under Pressure

ByEdward Thompson

Jul 14, 2022

On Thursday, the European STOXX 600 was brought lower because of pressure from banks and commodity stocks, as recession fears were fueled due to the expectations of aggressive rate hikes from the US Federal Reserve. Meanwhile, the main Italian index also plunged by 3.4%, as the government of the country faced a possible collapse.

Equity decline

There was a 1.5% drop in the continent-wide STOXX 600 index, as it added to the 1% decline recorded a day earlier, after higher than expected US inflation spurred expectations of a bigger rate hike than 75 basis points, which had already been priced in.

This year has been a tough one for global equities, as central banks are trying to control the soaring inflation, which has left investors concerned about its impact on economic growth. So far, there has already been a 16% fall in the STOXX 600 this year.

European economy

The European Commission has revised its inflation estimates for the eurozone this year and the next and it has reduced its economic growth forecasts for the same. Market analysts said that while recession fears are weighing on investors, they are more concerned about the discrepancy between the Fed and the European Central Bank (ECB) in terms of interest rate hikes.

Despite the rising inflation, the ECB is expected to hike the interest rates by 25 basis points next week. Meanwhile, the euro has fallen to a 20-year low against the dollar and this means inflation troubles in the eurozone could get worse.

Next week at the meeting of the European Central Bank (ECB), investors will be keeping their eye out for any comments about the decline in the euro as well as about the tool they have introduced for widening the spreads in eurozone bonds. Other topics that will be the focus include the inflation forecast and the extent of future interest rate hikes.

Italy’s troubles

There was a 3.4% drop in Italy’s MIB index, which brought it to its lowest level since November 2020. This was after a member of the coalition did not support a parliamentary confidence vote. This also included measures for offsetting the cost of living crisis that Italy is facing currently.

As soon as the vote was over, Draghi went to meet President Sergio Mattarella. The country has elections scheduled for next year. Analysts said that since there are only a couple of months left before the legislature ends naturally, it is likely that the President would try to ensure there is a government in such a critical economic and geopolitical environment.

There was a sharp rise in Italian bond yields, which widened the spreads with German yields. As far as stocks are concerned, those of miners and gas and oil fell by 3.8% each because of commodity prices. There was also a 3.1% fall in bank stocks. The only gainers were leisure and travel stocks, as they ticked up 0.5%. There was also a 2.4% gain in Hugo Boss after the German fashion brand upgraded its outlook for 2022.

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