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European Stocks Slip as Investors Mull ECB Stimulus, Inflation

European Stocks Slip as Investors Mull ECB Stimulus, Inflation

European equities fell Tuesday as investors assessed how soon pandemic stimulus could potentially be withdrawn and the effects of rising inflation.

The Stoxx Europe 600 Index was 0.5% lower by the close in London, weighed down by chemicals, health-care and utilities shares. Luxury shares outperformed, with Switzerland’s Swatch Group AG and Gucci-owner Kering SA gaining after Hong Kong moved toward reopening the border with China.

European stocks are hovering near a record high reached mid-August on the back of strong corporate earnings and economic growth potential. But the focus has now shifted to the risks of inflation and monetary policy, with investors awaiting the European Central Bank meeting on Thursday for clues on how soon it will move dial down emergency stimulus.

“Investors should be cautious of any hawkish guidance, which could kick off a correction,” according to Wael Makarem, a strategist at Exness. “But, with the ECB maintaining its current policy, it would be a great factor for reaching a new all-time high.”

European Stocks Slip as Investors Mull ECB Stimulus, Inflation

Morgan Stanley strategists expect European equities to continue outperforming due to the potential rebound in regional gross domestic product and earnings per share as well as supportive ECB policy, even as bond yields rise.

Meanwhile, Bank of America Corp. sees “the ‘goldilocks combination” of accelerating growth and lower real yields as coming to an end, said Milla Savova, the lender’s European equity strategist.

Still, the firm sees reasons for optimism. These include hopes for a faster recovery in the fourth quarter as Covid-19 cases decline, with real bond yields remaining below recent peaks amid upgrades to earnings estimates, she said.

As for inflation, Liberum Capital thinks it will remain transitory and should peak in the third quarter this year before declining in 2022, according to Joachim Klement, head of strategy, accounting and sustainability. “Hence, we would take market setbacks due to rising inflation fears as an opportunity to add to stock position,” Klement said.

Among individual movers, Meggitt Plc shares slumped 12% after TransDigm Group Inc. abandoned its pursuit of the U.K. engineering firm. Elsewhere, 888 Holdings Plc rose 1.8% after the company said it’s in advanced talks to buy rival William Hill’s non-U.S. operations after seeing off rival bids. Swiss cement maker Holcim Ltd. shares dropped 3.1% as it may face fresh criminal charges in France after its Lafarge SA unit lost a lawsuit.

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