LONDON: European equities fell Wednesday with traders on edge before key June inflation data in the United States. The London stock market sank by nearly one percent, around half-way through the session, despite news of rebounding UK economic growth in May. Eurozone stocks were down by about one percent after a mixed close in Asia. The euro clawed back slightly, one day after hitting dollar parity for the first time in two decades on concerns about a possible recession in the eurozone. Oil rebounded slightly having fallen sharply Tuesday on weaker demand expectations.


"Markets are on tenterhooks ahead of the US inflation data which will hold great sway over the Fed's rate-hike plans," said Exinity Markets analyst Han Tan. "A fresh four-decade high, along with more signs of unabating inflationary pressures, may well force the Fed to punch harder and faster in its battle against runaway consumer prices." Markets fear more evidence of red hot US inflation will prompt the Fed to keep hiking interest rates aggressively after it ramped up borrowing costs by three-quarters of a percentage point last month.

US inflation had spiked to a four-decade high of 8.6 percent in May. Inflation is soaring worldwide after economies reopened from pandemic lockdowns and as the Ukraine war keeps energy prices elevated. In a further sign of the pressure being felt around the world, the New Zealand and South Korean central banks each lifted interest rates by 0.5 percentage points Wednesday. It was the steepest increase by Seoul since 1999.

Europe gas crisis

The euro held above $1 a day after hitting parity for the first time since late 2002, as a worsening energy crisis fanned expectations that the eurozone would plunge into recession. With Russian energy giant Gazprom starting 10 days of maintenance Monday on its Nord Stream 1 pipeline, the bloc - and particularly gas-reliant Germany - is waiting nervously to see if the taps are turned back on. The single currency has been hit also by the European Central Bank's reluctance to raise rates - in contrast to monetary policy elsewhere.

"A prolonged cut to the gas supply would halt a lot of economic activity, sending (Germany) deep into recession," said Tapas Strickland at National Australia Bank. He said July 21 - when the gas should be switched back on - will be a crucial date. "That date also happens to be the day of the next ECB meeting," Strickland added. "Either of these events are key risk events. Russia playing gas politics by not switching on the gas supply would likely see the euro lurch much lower."

German investor morale

Meanwhile, German investor confidence dropped in July, a closely watched survey showed on Tuesday, as industry fretted over the potential impact of a halt in Russian gas  supplies on Europe's largest economy. The ZEW institute's economic expectations index fell 25.8 points to minus 53.8 points, its lowest level since 2011.

For its survey, ZEW quizzes experts about the current economic situation and the outlook for the coming six months. A negative reading means that most experts are pessimistic. The July reading was "slightly lower" than the level seen in March 2020 at the start of the coronavirus pandemic, when shutdowns effectively halted large parts of the economy, ZEW said in a statement

Concerns surrounding Germany's energy supply, an imminent rise in European Central Bank interest rates and continuing coronavirus-related restrictions in key market China contributed to a "significant worsening of the economic outlook", ZEW president Achim Wambach said. Morale among export-oriented and energy-intensive industries fell "particularly sharply", Wambach said.

On Monday, Russian energy giant Gazprom halted supplies to Germany via the Nord Stream 1 pipeline as it began maintenance work on the link. But concern in Europe's largest economy is widespread that the pipeline will not come back online after the service period, threatening Germany with a winter shortage. A long-term shutdown would hit industry hard, with authorities already preparing for the possibility of rationing supplies. Investors' assessment of the current economic situation also fell by 18.2 points in July to minus 45.8 points, according to the survey. - AFP