European Stocks Slide as Eurozone Inflation Rises to a 10-Year High

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Principal Points

• Markets in Europe slid on Tuesday pressured by a higher-than-expected inflation report
• Wall Street stocks finished Tuesday lower but gained substantially in August

European markets dipped modestly on Tuesday as investors had to price in an unexpectedly sharp jump in eurozone inflation along with the potential re-introduction of transatlantic travel restrictions in the face of rising Delta virus cases.

The pan-continental Stoxx 600 slid 0.38% on Tuesday, finishing the trading session at 470.88. All major European bourses slipped into negative territory. UK’s FTSE100 declined 0.40%, while Germany’s DAX fell 0.33%. France’s CAC40 and Spain’s IBEX35 inched lower by 0.11%, and 0.25%, respectively.

Inflation in the euro area, the 19-country bloc unified by the single European currency, has risen to its highest level in 10 years, posing increased difficulties for the European Central Bank to navigate its ultra-loose policy amid a high-inflation environment. The eurozone’s harmonized index of consumer prices rose 3% in August from a year ago, up from 2.2% in the previous month. The rise topped expectations of 2.7% and arrived at a level last seen in November 2011.

Higher prices in August have been reported in the majority of the eurozone members. Estonia, Lithuania, and Belgium saw their consumer prices rise between 4.5% and 5% in August on an annualized basis. Only four of all 19 EU countries in the bloc have reported inflation below ECB’s target of 2%.

Economists point to the large-scale reopening across Europe as the main force that has been fueling inflation in recent months.

Eurozone Inflation Expected to Decrease

Most analysts and European Central Bank officials, including ECB President Christine Lagarde, expect eurozone inflation to fall as soon as next year. According to Ms. Lagarde, the current inflation spike is the result of temporary factors.

Nevertheless, inflation expectations put pressure on the ECB to consider a possible slowdown in its bond purchases, part of the €1.85tn pandemic emergency purchase program (PEPP), ECB’s main tool to tackle the coronavirus crisis.

European Central Bank’s governing council will meet next week to discuss whether they should start scaling down the monetary support to allow the economy to cool down.

Meanwhile, European countries received a recommendation from Brussels to halt nonessential travel from the US due to the rapid rise of Covid-19 cases. As the recommendation is still a form of guidance, and not mandatory, many European countries are not in a rush to introduce travel curbs for Americans.

Stateside, Wall Street’s S&P500 index slipped about 0.1%, while the Nasdaq Composite was essentially flat on Tuesday. Both major benchmarks hit record highs a day earlier. The Dow Jones Industrial Average declined moderately by less than 40 points.

European bourses and Wall Street stocks alike enjoyed a flurry of record-setting days in August. Despite jitters caused by inflation and possible monetary policy shifts, Europe’s Stoxx 600 advanced nearly 2% in August, marking its seventh straight month of gains and its longest winning streak in eight years.

The S&P500 is also in a seven-month-long winning stretch with August gains at 2.9%.

Cryptocurrencies this week have been trading mixed with bitcoin, rather surprisingly, shunted out of the spotlight. So far in the week, bitcoin’s performance shows a decline of more than 3%. Ether, in contrast, is making solid gains for a third straight day.

The Ethereum token is higher by nearly 10% so far in the week, currently hovering at a three-month high above $3,500 per coin.