European Stocks Sharply Lower, ECB Raises Inflation Target

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Principal Points

• Stocks decline broadly in Europe as Delta variant threatens to undermine reopening
• ECB changes its inflation target as a way to maintain interest rates lower for longer

Stocks across the European markets closed significantly lower on Thursday as investors globally were offloading shares amid concerns that the economic recovery could be slowing down. All major European bourses ended the day in a sea of red, causing a sharp move higher in bonds.

The continent-wide Stoxx Europe 600 declined 7.92 points, or 1.72%, to 451.61. The move was accompanied by a decision from the European Central Bank to raise its inflation target to 2% from “below but close to” the same number.

“When the economy is operating close to the lower bound on nominal interest rates, it requires especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched,” the ECB said in a statement. “This may also imply a transitory period in which inflation is moderately above target.”

Bank stocks in the euro area slipped around 3%, while government bond yields maintained their downward course as investors fled to bonds. Bond yields fall as prices rise. The sharp drop in the broad Stoxx 600 index pushed it into negative territory for the month and it now floats about 2% away from its record high in June.

National indexes suffered their worst daily performance in weeks. Spain’s IBEX35 nosedived 2.31%, while France’s CAC40 tumbled 2.01%. The German DAX dropped 1.73%, and the UK’s FTSE100 sank 1.68%.

A Decline in Unemployment Benefits Claims

In the US, Wall Street joined the selloff even before the opening bell in New York. Futures tied to the Dow indicated a lower open by nearly 200 points. Investors were unable to sustain the recent upside move in stocks and the Nasdaq Composite slid as much as 2% at one point before recovering slightly.

All three major US stock benchmarks went through their worst session in almost three weeks as market participants unwound their risky bets.

High inflation pressures, the spread of the Delta variant, and a slowdown in job creation were focal points yesterday when the stock market rally lost its steam. The wide-ranging selloff pushed all 11 sectors of the S&P500 lower by the end of the day.

Initial unemployment claims, a proxy for layoffs, increased by 2,000 the week ended July 3 to a seasonally adjusted 373,000, according to data from the Labor Department. Meanwhile, the number of Americans receiving unemployment aid for the week ended June 26 fell sharply by 145,000 to the lowest level since the pandemic began. Unemployment assistance payments have been on a steady decline as states are ending their participation in the program.

On the coronavirus front, the Delta variant is forcing countries to rethink their Covid-19 strategies. Rising infection rates globally are causing governments to reintroduce restrictions as a way to curb the spread of

the highly transmissible virus strain. The Delta variant is now dominant in the US as it makes up to 80% of cases in some regions with low vaccination rates.