European stocks tick lower as central banks point to more challenging 2023

European stocks and US futures slipped further on Friday after a sharp sell-off in the previous session triggered by warnings from multiple central banks that interest rates are likely to remain higher for longer to battle inflation.

The regional Stoxx Europe 600 fell 1.2 per cent in early trading and London’s FTSE 100 lost 1.1 per cent. Contracts tracking Wall Street’s S&P 500 and those tracking the tech-heavy Nasdaq 100 fell 1.3 per cent and 1 per cent, respectively.

The moves come after a week in which the Federal Reserve, the Bank of England and the European Central Bank all slowed the pace of their interest rate rises while warning that further tightening of monetary policy would be required.

Equity markets sank as a result, with the S&P 500 and the Nasdaq Composite on Thursday suffering their biggest daily losses since November. The Stoxx 600 registered its biggest decline since May.

Financial markets were left “awestruck” by the hawkishness of various central banks, said Agnès Belaisch, chief European strategist at the Barings Investment Institute. “This is emerging market-type repricing post a central bank meeting, it’s wild”.

Economists think inflation has peaked in the US, the UK and Europe, but any good news was this week overshadowed by grim forecasts of slowing economic growth and higher unemployment.

Yields on longer-dated government bonds in the US and Germany have dipped below yields on shorter-dated notes, indicating a slowdown on the horizon in both regions.

The yield on the two-year German government bond, which moves with rate expectations, on Friday rose 0.1 percentage points to 2.47 per cent, its highest level since 2008. The yield on 10-year Italian government debt rose 0.2 percentage points to 4.34 per cent. Yields rise as prices fall.

“While other major central banks have started to prepare for the end of their hiking cycles, the ECB is giving the impression that it has just got started,” said Carsten Brzeski, global head of macro at ING.

The central bank’s message that interest rates were set to rise “significantly” at a steady pace amounted to a “hawkish pivot” and suggested “the last doves must have left the ECB building”, Brzeski added.

Data out on Friday showed the downturn in eurozone manufacturing and services activity eased more than expected in December, with S&P Global’s flash eurozone composite purchasing managers’ index rising to 48.8 in December from 47.8 in the previous month. A score below 50 indicates a majority of businesses reported a contraction over the previous month.

UK business activity slowed for the fifth consecutive month in December, with the country expected to tip into recession “for a prolonged period,” according to BoE governor Andrew Bailey.

Currency markets were, meanwhile, relatively muted on Friday after volatile trading in the previous session. The dollar traded flat against a basket of six other currencies.

Asian stocks were mixed, with Hong Kong’s Hang Seng index up 0.4 per cent, Japan’s Topix down 1.2 per cent and South Korea’s Kospi flat. China’s CSI 300 traded in a tight range.

Oil prices slipped, with Brent crude, the international oil benchmark, down 2.5 per cent at $79.17 a barrel.