Europe’s main stock markets retreated Thursday as dealers continued to digest hotter-than-expected eurozone inflation, although London losses were capped by bright earnings and a possible looming interest rate cut from the Bank of England.
Sentiment remains somewhat soothed one day after the the US Federal Reserve flagged a potential September rate reduction, although Asia equities diverged with Tokyo tumbling on a stronger yen following this week’s Bank of Japan hike.
The Bank of England will announce its latest monetary policy decision at 1100 GMT, with analysts split on whether it will cut for the first time in four years following a sharp slowdown in UK inflation.
London’s downside was also limited after Rolls-Royce revealed plans to reinstate dividend payments after a strong turnaround, sending shares in the British aircraft engine maker soaring to a record high.
Other well-received numbers were also posted by defence giant BAE Systems, the London Stock Exchange Group and energy major Shell.
“Mainland European markets are heading sharply lower… as traders continue to weigh up the higher-than-expected headline and core eurozone (inflation) rates,” noted Scope Markets analyst Joshua Mahony.
“Nonetheless, those hoping for a blockbuster September should feel encouraged by yesterday’s (Fed) meeting.”
The eurozone’s annual inflation rate unexpectedly edged up in July due to rising energy costs, data had showed Wednesday, leaving it still uncertain if the European Central Bank will cut interest rates in September after doing so in June.
In contrast, Fed chief Jerome Powell indicated that decision-makers were increasingly confident inflation and the economy were at a point where they could start loosening monetary policy.
He added after a highly anticipated two-day meeting, where US borrowing costs were kept at 23-year highs as expected, that the first reduction could come “as soon as” September if data continued to improve.
“The Fed leaving rates unchanged yesterday wasn’t a surprise, but comments from Fed chair Powell about a ‘real discussion’ on cutting rates has kept hopes alive for a near-term cut,” said Russ Mould, investment director at AJ Bell.
“Investors will be sitting on the edge of their seat at midday, hoping that (Bank of England) rates come down as that will start to take the pressure off household finances and potentially give equity markets another boost.”
Powell’s remarks follow a string of reports suggesting that US consumer prices were being brought under control and the labour market was softening.
He has also told lawmakers that inflation did not need to hit the Fed’s two percent target before a cut.
Traders are now fully pricing in a reduction in September and possibly two more before the end of the year.
“We continue to expect that the Federal Reserve will cut rates in September and December, followed by four 25 basis point reductions in 2025,” said JP Morgan Asset Management’s Raisah Rasid.
The prospect of US borrowing costs coming down in around six weeks sent Wall Street’s three main indexes surging.
Oil prices extended this week’s big gains fuelled by rising tensions in the Middle East, as Hamas vowed retribution after political leader Ismail Haniyeh was killed in a strike in Iran that was blamed on Israel.
Key figures around 1000 GMT
London – FTSE 100: DOWN 0.1 percent at 8,356.58 points
Paris – CAC 40: DOWN 1.0 percent at 7,459.38
Frankfurt – DAX: DOWN 0.9 percent at 18,334.27
Euro STOXX 50: DOWN 0.9 percent at 4,830.69
Tokyo – Nikkei 225: DOWN 2.5 percent at 38,126.33 (close)
Hong Kong – Hang Seng Index: DOWN 0.2 percent at 17,304.96 (close)
Shanghai – Composite: DOWN 0.2 percent at 2,932.39 (close)
New York – Dow: UP 0.2 percent at 40,842.79 (close)
Dollar/yen: UP at 149.89 yen from 149.88 yen on Wednesday
Euro/dollar: DOWN at $1.0784 from $1.0828
Pound/dollar: DOWN at $1.2762 from $1.2858
Euro/pound: UP at 84.50 pence from 84.19 pence
West Texas Intermediate: UP 0.7 percent at $78.46 per barrel
Brent North Sea Crude: UP 0.7 percent at $81.43 per barrel
