FRANKFURT: European stocks recouped earlier losses and closed up on Wednesday, as investors added to bets that the Federal Reserve could lower interest rates later in the month after an in-line US inflation report.
The pan-European STOXX 600 index had slipped earlier in the day, but settled higher by 0.3% after US data showed the Consumer Price Index (CPI) rose as expected in November on both a monthly and annual basis.
Odds of a 25-basis-point cut by the Fed next week stood at 95%, as per CME’s FedWatch tool, compared with about 85% before the data.
Closer to home, focus will be on the European Central bank’s policy move on Thursday, with LSEG probabilities data indicating an 85% chance for a 25 bps reduction.
“The weakness in the business surveys, combined with the potential for tariffs on European exports to the US, increases the risk of a European recession,” said Joe McConnell, European Liquidity Strategies Portfolio Manager at J.P. Morgan Asset Management.
McConnell expects the ECB will cut rates by 0.25% at every meeting between now and June, taking the deposit rate down to 2% by the middle of next year.
The rate-sensitive banks index edged up 0.1% to touch its highest since August 2015. More broadly, expectations of interest rate cuts have been the primary driver for the STOXX’s 8.6% so far this year.
The aerospace and defence sector led gains on the day with a 1.4% rise and has witnessed the biggest gains among peers this year. Investors monitored Ukraine’s latest strike on Russia using US-made missiles.
However, disappointing corporate updates kept a lid on advances, with Zara owner Inditex sliding 6.5% after the world’s biggest listed fast-fashion retailer posted a rare miss on third-quarter sales even as it said the holiday shopping season had got off to a good start.
Spain’s main index hit a one-week low and the broader STOXX retail index dropped 1.8%, and notched its biggest percentage drop in more than a month.
France was also in focus after President Emmanuel Macron on Tuesday set himself 48 hours to name a new prime minister.