European stocks

European bourses in red as Eurozone inflation soars

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European stocks closed lower on Friday (Jan. 7) after data showed annual inflation in the Eurozone hit an all-time high of 5% in December.

Germany’s DAX fell, 0.65% while France’s CAC 40 dropped 0.42%. The pan-European Stoxx 600 ended down 0.47%, with most sectors in negative territory. The biggest drag were travel and leisure stocks.

The UK bucked the trend with London’s FTSE 100 index closing up 0.5%. Austria, Netherlands, Norway, Russia also were higher. Markets in Denmark, Finland, Ireland, Spain and Sweden ended weak, while Belgium, Czech Republic, Greece, Iceland, Poland and Portugal settled flat.

Economists surveyed by The Wall Street Journal had expected eurozone’s inflation rate to ease to 4.7%.  The main driver of the on-year increase was energy prices, which rose 26.0% on year compared with 27.5% in November, followed by food, alcohol & tobacco (3.2% vs 2.2%), non-energy industrial goods (2.9% vs 2.4%) and services (2.4% vs 2.7%), Eurostat said.

Estonia saw the highest inflation rate among eurozone members, with the cost of living jumping by an estimated 12% year-on-year.

December marked the 6th straight month the inflation stays above the European Central Bank’s target of 2%. As in the U.S., eurozone consumer prices have risen faster than policy makers had anticipated over recent months, raising questions for investors, businesses and households about the credibility of the ECB’s assertions that high inflation is likely to be temporary.

“Is this peak inflation? This depends to a significant degree on gas price developments, which have been incredibly volatile in recent weeks and a dominant driver of the recent inflation surge” ING wrote.

Another economic release hurt as well. Eurozone’s economic confidence index declined to 115.3 in December from 117.6 in November.

stoxx600
(Source: Google Finance-Processing by WMD)

Investors were also digesting  disheartening reports on Germany’s trade balance and industrial production. The trade surplus of the bloc’s largest economy, dropped to its smallest level in November since 2011, according to Reuters.

Meanwhile, German industrial output dropped 0.2% month-on-month in November, reversing a 2.4% rise in October, Destatis said. Economists had forecast production to climb 1% On a yearly basis, industrial production declined 2.4% after easing 0.9% in the previous month. In addition,

US jobs figures caused further turbulence. Employment in the world’s largest economy increased by much less than expected in December. U.S. Nonfarm payrolls grew by 199,000 last month while economists had expected employment to jump by 400,000 jobs. The unemployment rate fell to 3.9%, according to a closely-watched report released by the Labor Department on Friday. The figures increased expectations that the US Federal Reserve will raise interest rates for the first time since Covid struck.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, told the Evening Standard: “The realisation has dawned on investors that the drug of cheap money is set to be withdrawn a lot sooner than first forecast.”