European Stocks Make Cautious Start To 2024; Energy Shares Rally

(Bloomberg) -- European stocks slipped on the first day of trading in 2024 as bonds retreated, while energy shares outperformed as crude oil rose amid increased tensions over the Red Sea.

The Stoxx Europe 600 erased gains of as much as 0.7%, dropping 0.2% at 12:03 p.m. in London. Yields on 10-year US bonds and German bunds rose as money markets wagered on fewer than 150 basis points of easing by the Federal Reserve in 2024.

Energy stocks gained, buoyed by gains in crude after Iran sent a warship to the Red Sea in response to the US Navy's sinking of three Houthi boats over the weekend. Consumer products and technology stocks lagged.

Among individual movers, AP Moller-Maersk A/S rose after halting transit through the Red Sea following an attack on one of its ships by Houthi rebels. ASML Holding NV fell after Bloomberg reported it canceled shipments of some of its machines to China at the request of US President Joe Biden's administration. 

Tensions in the Middle East have escalated, with the move by Iran complicating Washington's goal of securing the Red Sea, a waterway that's vital to global trade. Elsewhere, a private gauge of China's factory activity gained momentum in December, contrasting with official data that suggested the outlook for manufacturers remains fragile in a nation where European firms have high exposure.

European stocks gained 13% in 2023 amid optimism that central banks will soon pivot to interest rate cuts, protecting regional economies from major contractions. The rally sent the Stoxx 600 to overbought levels, as indicated by its 14-day relative-strength index. Eurozone inflation figures due later this week will provide clues about monetary policy.

“European equity markets will likely start to focus on the inflation data later in the week that should confirm the rapid decline in inflation,” said Joachim Klement, a strategist at Liberum. “This may support stocks this week as the rally is mostly driven by hopes for rapid rate cuts.” 

“However, we remain cautious for the next couple of weeks and months as markets are heavily overbought and need to consolidate before they can sustain another leg up,” he said.

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