The European stock markets reached their highest point since May 2022: what were the causes

Wall Street closed higher on Tuesday and European stocks pared losses as risk appetite improved on expectations of weaker inflation data and after Fed Chairman Jerome Powell declined to comment. on rate policy in the United States.

The STOXX 600 climbed 5.4% so far this yearhelped by a sharp decline in natural gas prices due to warmer weather, and as data pointed to a milder-than-expected recession in the Eurozone.

Signs of slowing wage inflation last week also prompted bets for less aggressive tightening by the Federal Reserve and European Central Bank.

On Wednesday, rate-sensitive tech stocks rose 1.3%. Energy markets advanced 0.9%, while miners gained 0.1%, as commodity prices rose on optimism about the reopening of the borders of China, its main consumer.

Among individual stocks, Direct Line Insurance Group Plc suffered the worst drop in the STOXX 600, plunging 23.5%, after the British auto and home insurer unexpectedly scrapped its 2022 final dividend. Rivals Admiral and Aviva were down 6.8% and 2.1%, respectively.

However, Britain’s commodity-heavy FTSE 100 index reached its highest level in more than four years, thanks to gains from big oil and mining giants.

LVMH gained 2.1% after Chief Executive Bernard Arnault tightened his family’s grip on the luxury goods empire, putting his daughter Delphine at the helm of one of its top brands, Christian Dior.

1. Inflation

The upward move was triggered by sentiment and data indicating that inflation may have peaked. Inflation for December was announced last week at 9.2%, below expectations of 9.5%. While it is still a remarkably high number, the fact that it is below 10.15 from the previous month is giving the markets momentum.

2. the opening of china

There was something other than inflation that was driving the markets. Market sentiment this week has been driven by a further reopening of the Chinese economy. China resumed quarantine-free travel over the weekend, a watershed moment for the nation after nearly three years of closed borders.

While COVID cases are rising in the country (reports claim that 50-70% of Shanghai’s 25 million residents may be infected), this is actually a good thing for markets. While it may sound insensitive, the faster COVID progresses, the better, at least from an economic standpoint. The fact that travel is now opening up too has signaled that, once and for all, COVID restrictions finally seem to have released their stranglehold on the world.

3. The markets of Germany and France rise

Looking within Europe, the French market was boosted last week by a soft inflation reading. Meanwhile, German stocks rose after industrial production numbers beat expectations for November.

Eurozone-wide unemployment is also giving good news. Or, at least on the surface it is. The unemployment figure stood at 6.5% in November, the same as in October. This is the lowest number since record-taking began in 1998.

This is interesting data because inflation is receding, albeit slightly, while employment remains tight. Many analysts, myself included, had warned that inflation would not subside without a measurable increase in unemployment. The labor market must relax and the demand must fall.

However, unemployment is expected to rise. Undoubtedly, Europe has enjoyed what is definitely a more positive outlook today than last month, but the overall picture remains ominous. Recessionary pressures are mounting, and the ECB has been forced to rise to its highest levels since 2008. This puts an end to debt-laden economies like Italy, which are pressured by higher interest payments on said debt. .

There’s just no way unemployment isn’t going to rise a bit in the first half of this year as the pressure intensifies. But for the first time in a long time, there is a little hope in the euro bloc that things may not be as bad as they seemed in recent months.