European Stocks Are Set to Erase Weekly Gains on Policy Worries

Stock price information reflected on a window at the Euronext NV stock exchange in Paris, France, on Monday, March 13, 2023. Investors poured money into the safest assets, snapping up government bonds and gold, and unloaded bank shares as the collapse of Silicon Valley Bank reverberated across trading desks. Photographer: Nathan Laine/Bloomberg

(Bloomberg) -- European stocks declined on Friday, setting the benchmark index on course to wipe out a weekly gain, as worries about the possibility of hawkish-for-longer central banks outweighed optimism around cooling inflation.

The Stoxx 600 Index was down 1.1% at 3:07 p.m. in London. While data on Thursday showed core US inflation rose only modestly, Federal Reserve Bank of San Francisco President Mary Daly said the central bank had more work to do to tame price pressures. A hotter-than-estimated producer price index reading on Friday also added to speculation the Fed will keep policy tighter for longer.

The index is now flat for the week. Technology and real estate sectors led declines Friday, while utilities outperformed. Telecom Italia SpA erased early gains that were sparked by KKR & Co. signing a memorandum of understanding with Italy to include the government in its €23 billion ($25.3 billion) bid for the company. Bechtle AG jumped as it reported better-than-expected pretax profit for the second quarter.

UBS Group AG gained as it decided to end an agreement with the Swiss government to cover losses it could incur from the rescue of Credit Suisse, in a sign that the stricken lender's assets might be less troublesome than initially feared.

After rising for two straight months, the European stocks benchmark has pulled back in August as investors worry about higher interest rates and a lackluster corporate earnings season. Outflows from regional stock funds extended for a 22nd straight week, according to a Bank of America Corp. note citing EPFR Global.

Still, Sanford C. Bernstein strategist Sarah McCarthy said the valuation gap with US equities “is now more extreme than ever,” keeping European stocks more attractive. In a note on Friday, she reiterated an overweight recommendation in Europe versus the US.

Meanwhile, data in the UK showed the economy grew more strongly than expected in the second quarter after activity roared back in June following an extra bank holiday for King Charles III's coronation. Neil Birrell, chief investment officer at Premier Miton Investors, said the figures would keep the Bank of England walking “a tightrope” in the next few months.

“They may well have been thinking about pausing interest rate increases soon, but this data will make that more difficult and, at the same time, increases the risk of rates staying too high for too long and causing a worse recession,” Birrell said.

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