European stocks waver as sentiment diverges on global economic outlook

European stocks and US futures slipped on Tuesday as traders balanced an improving macroeconomic outlook for the global economy against lingering concerns that inflation might prove stickier than previously thought.

The regional Stoxx Europe 600 and Germany’s Dax lost 0.3 per cent and 0.2 per cent, respectively. London’s FTSE 100 fell 0.2 per cent after UK public sector borrowing more than doubled year on year in December to £27.4bn.

Contracts tracking Wall Street’s blue-chip S&P 500 and those tracking the tech-heavy Nasdaq 100 fell 0.3 per cent and 0.4 per cent, respectively, ahead of the New York open.

“Better sentiment on [the] growth outlook” helped the S&P 500 rise to its highest level since early December on Monday, according to analysts at JPMorgan, with semiconductor and technology stocks in particular posting strong gains.

The US bank does not expect January’s equity market rally to last, however. “The recent weakening of economic data and anticipated decline in earnings expectations and weak [full-year] guidance are pointing to markets that are likely to move lower,” it said.

Others are more optimistic. China’s economic reopening, receding recession fears in Europe and cooling inflation in the US mean “investor concerns over a harder landing for the global economy” have eased, said Lee Hardman, currency analyst at MUFG. Traders have a “fresh confidence that central banks can pause their rate hike cycles” later this year, he added, even as officials at the US Federal Reserve and European Central Bank insist their fight against inflation is far from won.

The eurozone “edged back into growth” at the start of 2023, according to a flash purchasing managers’ index released by S&P Global on Tuesday morning, with business activity in January rising after six successive months of decline.

The data “adds to evidence that the region might escape recession”, said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Capital Economics’ chief Europe economist Andrew Kenningham said the region’s PMI was consistent with the economy “roughly stagnating”, adding that “there is nothing here” to stop the ECB raising rates by 1 percentage point over the next two months, “and perhaps further beyond that”.

Manufacturing and services PMIs for the US, published later in the day, are expected to decline. Shares in pharmaceutical group Johnson & Johnson and General Electric inched higher in pre-market trading after the groups posted their fourth-quarter results.

The dollar came under pressure on Tuesday, with a measure of the currency’s strength against a basket of six peers down 0.1 per cent. US government bonds rallied, with the yield on the benchmark 10-year Treasury falling 0.02 percentage points to 3.5 per cent. Bond yields move inversely to prices.

In Asia, Hong Kong’s Hang Seng index gained 1.8 per cent and China’s CSI 300 rose 0.6 per cent. Japan’s Nikkei 225 added 1.5 per cent, having all but recovered from a sell-off triggered by the Bank of Japan’s surprise adjustment to its longstanding yield curve control measures in late December.