On Monday, European shares recorded declines, while there was a rise in bond yields, as comments from policymakers of the ECB increased worries about aggressive measures for battling inflation and a rise in recession risks.
The comments’ impact
There was a 0.9% drop in the pan-European STOXX 600 index, which brought it to a low of one month, as a 1.8% decline was seen in tech stocks that are sensitive to interest rates.
There was a 10 basis points increase in the 10-year German bond yields, which saw them reach a high of two months.
Isabel Schnabel, a member of the European Central Bank’s board, said over the weekend that central banks need to be aggressive in their fight against inflation.
She stated that they need to do so, even if there is a possibility of an economic recession, while policymaker Martins Kazaks and council member Francois Villeroy also hinted at a big rate hike next month.
Their comments came after the warning delivered by the chairman of the US central bank, Jerome Powell, who said that the Fed would continue hiking rates and keep them there for a while.
Markets are betting that there is a two-thirds chance of a 75 basis points rate hike in September, which is higher than a 24% possibility in the previous week.
Next meeting’s predictions
Market analysts said that investors were catching up with the hawkish attitude of central banks, which means there is a possibility that bearish repricing of the rate path of the ECB may extend.
This is primarily because the inflation outlook is expected to get worse before it gets better. On Wednesday, the flash consumer price index for August is due for release.
It is expected to show that the euro zone’s inflation rate remains uncomfortably high. Analysts said that neither Villeroy nor Schnabel had stated what they would recommend at the next meeting.
It is likely that the policymakers are going to assess August’s inflation data first and the revised economic forecasts of the ECB before they make a decision.
Stocks
There has almost been a 3% drop in stocks in the last two sessions, as sentiment was weighed down due to the combination of a looming energy crisis, a possible recession, and massive rate hikes for controlling aggressive inflation.
Last month, the benchmark STOXX 600 index had almost erased June’s sell-off, but it has already dropped by 4% in August.
One of the few gainers in stocks was Valneva, as the French drugmaker rose 0.9% due to its positive results for the COVID-19 shot.
There were only slight losses recorded in real estate stocks, which are considered safer options in times of economic uncertainty or called ‘defensive’. Otherwise, there was a broad sell-off in the STOXX 600.
As for markets in the United Kingdom, they were closed down on Monday because of a holiday. There was also a rise in the volatility gauge for stocks in the euro zone to a high of six weeks at 29.4.