On Friday, there was a 2.3% drop in European shares and hit the lowest level in three weeks, after the US inflation data turned out to be higher than expected. This gave rise to concerns about a possible recession, as central banks are trying to control the surging inflation globally. There were broad-based losses recorded in the STOXX 600 European index, which was led by a decline in banks by 4%. The declines in the index continued for the fourth session in a row, which put it on course to losses of more than 3% for the week. There was a 4.5% drop in the Italian MIB index, as it reached the lowest levels in the last three months. Likewise, a 3.3% loss was recorded by Spain’s IBEX and there were 2% losses recorded in each of the other major bourses in the region.

Inflation Data for May

The predictions for the US inflation data for the month of May had been around 8.3%, but the data showed that the country saw prices go up by 8.6%. This indicated that the US Federal Reserve was likely to continue with its interest rate hike of 50 basis points through September in order to tame the soaring inflation numbers. Investors will be closely watching the central bank’s take on the latest inflation numbers in the policy meeting scheduled for the next week.

On Thursday, equities had already taken a beating after the European Central Bank (ECB) said that it would begin its first hike in the interest rate the next month, which comes after 2011. It also hinted at a potentially larger hike in September. Market analysts said that markets were feeling the heat because the surging inflation forces the hand of central banks and they become aggressive in terms of tightening their monetary policy. Now, the greatest worry people have is whether the banks will combat inflation or dip the economy into recession.

Banks Accelerate Losses

Banks were already down because of peripheral lenders like the ones in Italy suffering from losses and they took a further beating on concerns about the widening gap between bond yields and spreads in Germany and Italy. Analysts also added that the risk of stagflation is also a risk that banks have to contend with. It is obvious that this would not be good for the banks because of bad loans, increasing default rates as well as provisioning for bad debts.

There were also rising concerns about growth and demands in the second-largest economy in the world. This is because China’s Beijing and Shanghai once more imposed coronavirus curbs. In the week that ended on Wednesday, European equity funds recorded outflows for the 17thweek straight because of the concerns about the Russia-Ukraine conflict. There was a decline in regional airlines, as labor shortages in Europe will result in travel headaches in the upcoming summer season. There was a drop of 2.1% to 3.1% in Wizz Air, Lufthansa and Ryanair International Consolidated Airlines.

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