Record high inflation pushes eurozone shares to session lows

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German share price index DAX graph is pictured at the stock exchange in Frankfurt

By Susan Mathew and Shreyashi Sanyal

(Reuters) – Eurozone shares hit session lows on Tuesday after data showed inflation rose to a record high in May, spurring bets of bigger interest rate hikes by the European Central Bank (ECB).

Inflation in the 19 countries sharing the euro accelerated to 8.1% in May from 7.4% in April, beating expectations for 7.7% as price growth continued to broaden, indicating that it is no longer just energy pulling up the headline figure.

The STOXX index of eurozone shares dropped 1.3% and the pan-European STOXX 600 index, flat before the reading, fell 0.7%.

“The eurozone’s high inflation reading has prompted stocks to reverse course, showing that investors are still very jumpy when it comes to the economic outlook and continued high inflation readings,” said Chris Beauchamp, chief market analyst at online trading platform IG.

The euro region’s banks, which typically welcome signs of rising interest rates, slid 1.6% as investors worried about the hit to the economy from surging prices.

“This is resulting in market expectations of perhaps ECB acting more quickly,” said Bert Colijn, senior economist, eurozone, at ING. However, he added that ING still expects the central bank to hike rates by 25 basis points in July and September.

Investors will closely watch for any change in the ECB’s stance after its meeting next week. The central bank has so far signalled that it will begin its interest rate hiking cycle in July, with the rate seen rising to 0% or above by September.

The STOXX 600 was set to end May down 1.6%, adding to sharp losses earlier this year on concerns over central bank tightening, fallout from the Ukraine conflict and China’s tough COVID-19 curbs.

Fuelling concerns about inflation, Brent crude hit $123 per barrel after Europe vowed to cut most Russian oil imports in the bloc’s toughest sanction on Moscow since the invasion of Ukraine three months ago.

Nordic stocks hit a record high on Tuesday, last up 1% and among the day’s rare outperformers along with London’s FTSE index.

A 9.4% jump in consumer goods giant Unilever, lifted British stocks, after it named activist investor Nelson Peltz to its board.

Dutch speciality chemicals maker DSM jumped 8.0% on plans to merge with Swiss peer Firmenich. DSM also announced the sale of its engineering materials subsidiary for 3.85 billion euros ($4.13 billion) to private equity firm Advent International and German chemicals company Lanxess

Lanxess surged 11.2%.

(Reporting by Susan Mathew and Shreyashi Sanyal in Bengaluru; Editing by Sriraj Kalluvila, Shounak Dasgupta and Jonathan Oatis)

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