European Stocks Dip Amid Rate Cut Uncertainty and Economic Recovery Signals

Interest rate cuts typically provide cheaper financing for companies and consumers, boosting business and profits.

European stocks closed lower on Friday, capping a week marked by concerns over persistent U.S. price pressures and a recovering euro zone economy, which cast doubt on the likelihood of multiple interest rate cuts by major central banks this year.

The pan-European STOXX 600 index dipped 0.1%, resulting in a weekly loss of nearly 0.4%, the largest in three weeks.

Interest rate cuts typically provide cheaper financing for companies and consumers, boosting business and profits.

However, investor caution increased after European policymakers indicated hesitancy about further monetary easing beyond June to avoid exacerbating price pressures, especially if the U.S. Federal Reserve continues to delay its easing cycle.

Traders are now anticipating 55 basis points of cuts from the European Central Bank, down from 67 basis points a week ago.

Eurozone bond yields experienced their most significant weekly rise in a month.

This followed a survey revealing that euro zone business activity grew at its fastest rate in a year in May, alongside data confirming Germany’s economy expanded in the first quarter of 2024.

“With the pickup in growth momentum and inflation still declining, the (central bank) is in a favorable position to wait for the data in the coming months before making firm commitments on the policy rate path,” noted Danske Bank analysts.

Defensive stocks, which are less sensitive to economic cycles, such as utilities, healthcare, and food and beverage stocks, were among the hardest hit.

In contrast, cyclicals, including insurance and the auto sector, performed well.

Among individual stocks, Acciona slid 7.1% after the Spanish construction and energy conglomerate lowered its forecast for core earnings growth this year, based on current energy price forecasts.

Conversely, Renault rose 5.2%, making it one of the top performers on the main index after announcing a share buyback plan and receiving an upgrade from UBS to “neutral” from “sell”.

Equinor’s shares dropped by 2.7% after the Norwegian energy company and its partners in the North Sea Troll gas field, Europe’s largest, announced a $1.13 billion investment to further boost production.

Finally, Abrdn saw a 1.6% increase after the UK fund manager announced CEO Stephen Bird’s departure following a turbulent four-year tenure marked by significant outflows of client cash and a controversial re-branding.