European stock markets mixed as IMF cuts growth forecast for 2022
European stock markets gave up their early gains on Tuesday after the International Monetary Fund (IMF) cut its growth forecast for this year thanks to higher-than-expected inflation and the Omicron variant.
In London at the close, the FTSE 100 (^FTSE) finished 0.8% higher, as investors snapped up shares for discounted prices after it posted its biggest one day fall since 26 November on Monday. Meanwhile the CAC (^FCHI) ended with a 0.7% increase in Paris, and the Frankfurt DAX (^GDAXI) finished 0.6% higher.
The sectors making the biggest gains in London were those that lost the most previously, namely travel and mining stocks. The sour mood in European markets on Monday came due to events on the Russia-Ukraine border rather than any other factors that have dominated sentiment over the past two weeks.
“It appears that the penny has finally dropped with financial markets that events in eastern Europe have the potential to get even worse, after NATO announced it is putting additional ships and aircraft on standby for mobilisation, and that the US is considering sending troops to shore up its Baltic defences, in response to requests from the likes of Estonia for a greater US presence to deter a potential Russian escalation,” Michael Hewson of CMC Markets said.
It came as the UK economy is set to grow more slowly than initially forecast this year as it continues to recover from the coronavirus pandemic.
The International Monetary Fund (IMF) revealed on Tuesday that growth for 2022 has been cut to 4.7%, down from a previous 5%.
Watch: What is inflation and why is it important?
Meanwhile, the UK government borrowed £16.8bn ($22.7bn) in December, a rise from £16.6bn in November, but less than economists had expected.
According to the Office for National Statistics (ONS), this was the fourth-highest December borrowing since the monthly record began in 1993.
However, it was £7.6bn less than in December 2020, when the county entered its second national lockdown, thanks to improved tax revenues and savings in public spending.
Across the pond, the S&P 500 (^GSPC) dipped 1.7% and the tech-heavy Nasdaq (^IXIC) fell 2% after the bell. The Dow Jones (^DJI) also edged 1.2% lower on opening amid concerns that the US central bank will tighten monetary policy sharply to rein in inflation.
“The US Federal Reserve starts its two-day monetary policy meeting today and although no change is expected at tomorrow’s announcement, speculation is running high that Fed chief Powell will flag a sharp removal of accommodation at the next meetings,” Raffi Boyadjian, lead investment analyst at XM, said.
“Markets are now in no doubt that policymakers need to act quickly to get a grip on inflation. But there are worries that the Fed has fallen so behind the curve, it won’t be possible to bring inflation back under control without choking off growth.”
On Monday, the Nasdaq plunged as much as 5% at one point during the session, and the S&P500 slipped into correction territory, before a wave of bargain hunters piled in to leave each of the major indices finishing marginally ahead.
Read more: Majority of Brits won’t be able to save in 2022 due to higher bills
“At the same time, the persistently high level of inflation at present has led some observers to wonder whether the Fed is actually behind the curve, and whether any monetary tightening could be even more harsh than anticipated.”
Asian markets also tumbled overnight after the volatile day for Wall Street, fuelled by fears about the Federal Reserve’s plans to hike interest rates.
In Japan, the Nikkei (^N225) fell 1.6% while the Hang Seng (^HSI) fell 1.9% in Hong Kong, and the Shanghai Composite (000001.SS) slumped 2.6%