European stocks retreated on Wednesday as investors braced for another rise in US inflation and the start of the second-quarter earnings season.

The Stoxx Europe 600 Index was down 0.9% at 9:06 a.m. in London, with insurers and automakers leading the declines, while retail outperformed.

The benchmark gauge has attempted a rebound in July after posting its biggest half-year decline since the global financial crisis as investors bet that runaway inflation may show signs of peaking. But fears that central banks will remain hawkish even amid a looming global recession has kept a lid on appetite for risk assets.

Focus today is on the June reading of the US consumer price inflation index, which is expected to show a fresh pandemic peak that would keep the Federal Reserve geared for another big interest-rate hike later this month.

“Even if it’s a little bit lower than expectations, we’ll need more evidence for the Fed to change their path,” said Shanti Kelemen, chief investment officer at M&G Wealth. “What we see today probably doesn’t dramatically change the course. Hoping inflation peaks in August, otherwise we’ll have to raise inflation expectations further,” she said on Bloomberg TV.

For European stock investors, a potential energy crisis and the prospect of the euro reaching parity with the dollar are creating additional uncertainty. With the war in Ukraine, Russia cutting European gas supplies has become a big concern among market strategists, especially after the Nord Stream 1 pipeline was shut for scheduled maintenance.

In the UK, data showed economic growth unexpectedly jumped in May, driven by a surge in visits to doctors and holiday bookings. But Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said the data aren’t enough to ease fears of a recession. “Frankly, until there is a clear path out from political turmoil, the energy crisis, cost-of-living squeeze and the UK’s far-reaching productivity problems, it’s hard to see where the economy will find its take-off point,” she said. The FTSE 100 was down 1.1% on Wednesday.

With the second-quarter earnings season kicking off this week, strategists are divided on the resilience of corporate profits to the surge in prices and gloomy consumer sentiment. While Bank of America Corp. strategists say the earnings cycle is at a peak in Europe, BNP Paribas SA’s Ankit Gheedia expects results to be strong as profit margins are likely to remain supported by a demand backlog and price elasticity.

Among individual movers, Orion Oyj jumped to its highest level in more than two years after it upgraded its full-year outlook. Allianz SE, on the other hand, fell 2% as Citigroup Inc. downgraded the stock to neutral, turning more cautious on the insurance sector.

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Source:
courtesy of BLOOMBERG

by Sagarika Jaisinghani

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