European shares extend declines driven by policy tightening fears

European shares fell on Wednesday after higher-than-expected U.S. inflation this week cemented views of a large interest rate hike by the Federal Reserve, but a rally in oil stocks kept declines in check.

The continent-wide STOXX 600 index extended declines, falling 0.9%, with miners, industrials and consumer stocks weighing the most.

Data on Tuesday showing a bigger than expected rise in U.S. consumer prices in August strengthened the case for the Federal Reserve to deliver a third 75-basis-point (bps) interest rate increase next Wednesday.

Markets broadly took a hit after the data, and European shares failed to benefit from a recovery on Wall Street on Wednesday.

“European stocks have continued to fall as markets digest the outlook for inflation and rate hikes,” said Chris Beauchamp, chief market analyst at IG.

The European Central Bank delivered a 75 bps hike last week and signalled more to come in their fight against inflation. The European Union and its member states have undertaken several measures to cope with rising energy prices and an energy supply crisis due to the Russia-Ukraine war.

“Fears of a global recession and concerns about the overall weaker outlook for Europe mean that investors are even less keen to buy the dip here than they are in the U.S,” Beauchamp said.

With the ECB having just begun its hiking cycle as opposed to the Fed that started earlier this year, the STOXX 600 is down about 14% this year, faring better than the S&P 500 which has declined more than 17%, while the tech-heavy Nasadaq has tumbled 25%.

“The interesting thing about European inflation is that it has become much more policy-dependent, so we kind of expect inflation to peak somewhere at the end of this year,” said Erik-Jan van Harn, global economics & markets macro strategist at Rabobank in Utrecht, Netherlands.

Energy stocks gained 0.8% on Tuesday as oil prices rose after the International Energy Agency said it expects an increase in gas-to-oil switching due to high prices this winter.

Retailers jumped 0.8% led by Inditex, the owner of fashion brand Zara, which surged 3.8% after reporting a 24.5% jump in six-month sales and a higher profit than a year ago.

Spanish power company Iberdrola fell 1.9% as it agreed to sell a 49% stake in a German offshore wind farm for 700 million euros ($700 million).

German forklift truck maker Kion tumbled 29.7% to nine-year lows on a profit warning as the company struggled with supply chain issues and higher costs.