European shares fell on Tuesday after the latest signs that the eurozone economy is in better health than expected, giving central banks room to tighten monetary policy further.
The pan-European Stoxx 600 fell 0.25 percent, while Germany’s Dax and France’s Cac lost 0.55 percent. The FTSE 100 fell 0.15 percent.
The declines came after closely watched surveys of private sector activity in the eurozone showed faster-than-expected expansion. Market participants believe signs of economic resilience could encourage the European Central Bank to raise interest rates further as it seeks to curb high inflation. This would likely strengthen the euro, but could weigh on it eurozone stock markets.
According to Neil Birrell, chief investment officer at Premier Miton, investors are now more focused on interest rates than the prospect of stronger earnings due to strong economic activity. “People thought the end was in sight and there was some certainty, but every time we get a number like this, it worries investors,” he said.
The ZEW Economic Sentiment Index, which measures experts’ views on the strength of the German economy over the next six months, came in at 28.1, compared with last month’s rating of 16.9.
“If we see confirmation that growth has improved, it will help the euro,” said Francesco Pesole, forex strategist at ING. “At the same time, there are concerns on the geopolitical side that inhibit risk appetite, such as the anniversary of the Ukrainian invasion and speculation about a new offensive from Russia.”
ECB Governing Council member Olli Rehn said on Monday that rates would peak during the summer but that inflation was “too high”.
“With inflation so high, further rate hikes after March seem likely, logical and appropriate. . . I assume we will reach the ‘terminal rate’ over the course of the summer,” he said.
The data also dragged down bond markets, with German 10-year yields rising 0.04 percentage point to 2.5 percent. Yields on 10-year US Treasuries rose 0.05 percentage point to 3.88 percent.
Futures tracking the U.S. blue-chip S&P 500 fell 0.7 percent and the tech-heavy Nasdaq 100 fell 0.9 percent, suggesting further losses at the open on Tuesday after last week’s declines. US markets were closed on Monday for Presidents’ Day.
The dollar index, which measures the greenback against a basket of six peers, rose 0.2 percent.
Brent crude fell 0.4 percent to $83.76 a barrel, while the U.S. equivalent WTI rose 0.9 percent to $77.06 a barrel.
In Asia, the Hang Seng index fell 1.7 percent, while China’s CSI 300 improved 0.3 percent after rising 2.45 percent on Monday, its best one-day performance since late November. The index rose by 6.6 percent this year.
