European stock markets rise despite eurozone inflation hitting record high

·Business Reporter, Yahoo Finance UK
·4 min read
European stock markets shrugged off a stalling French economy on Friday. Photo: Gonzalo Fuentes/Reuters
European stock markets shrugged off a stalling French economy on Friday. Photo: Gonzalo Fuentes/Reuters

European stock markets continued their upward climb on Friday as investors turned their attention to a string of corporate results, shrugging off news that eurozone inflation hit a fresh record high.

In London, the FTSE 100 (^FTSE) closed 0.4% higher, while the French CAC (^FCHI) climbed 0.3%, down from earlier highs, and the DAX (^GDAXI) was 0.6% higher in Frankfurt.

It came as eurozone inflation rose to 7.5% in April, up from March’s 7.4% reading. Prices jumped by 0.6% in April alone, the statistics office Eurostat said.

Energy was the biggest single factor driving up annual inflation, with prices soaring 38% year-on-year, down from March’s 44.4%.

Food, alcohol and tobacco inflation increased to 6.4% from 5.0% in March, while industrial goods prices rose 3.8% from 3.4%, and services inflation accelerated to 3.3%, from 2.7% in March.

The news puts added pressure on the European Central Bank (ECB) to raise interest rates from current record lows this summer, in order to bring inflation down towards its 2% target.

Neil Birrell, chief investment officer at Premier Miton Investors, said: “Perhaps surprisingly the Eurozone Q1 GDP figure come in bang in line with expectations, with the economy avoiding recession over the 3 months. Inflation came in higher than expected in April, which wasn’t surprising. The ECB still has plenty to ponder, and markets will look at the short-term data, which will be volatile; as will markets.”

Watch: How does inflation affect interest rates?

On Friday, the French economy also unexpectedly ground to a halt in the first quarter of the year, with no change in GDP during the period. This marked a sharp slowdown from the 0.8% growth recorded at the end of 2021.

“For the coming quarters, the growth outlook is not very bright. The sharp rise in inflation, which is now spreading more and more widely throughout the economy, is weighing on household incomes,” Charlotte de Montpellier of ING, said.

“The situation in China should weigh on production lines, complicating the supply of inputs and disrupting production in the coming months, but also on French exports.

“French economic growth is therefore likely to remain weak. Although none of these factors is sufficient to tip the French economy completely into recession, the combination of all of them at the same time drastically increases the risk of one or two quarters of negative growth for the rest of the year.”

Elsewhere, Germany has reportedly dropped its opposition to sanctions on Russian oil.

Europe's largest economy has so far attempted to block a ban on the Kremlin's energy, warning such a move would spark recession across the continent. However, vice chancellor Robert Habeck has now said that Germany "won't stand in the way" of new sanctions.

Across the pond, the S&P 500 (^GSPC) dipped 1.6% and the tech-heavy Nasdaq (^IXIC) fell 1.6%. The Dow Jones (^DJI) edged 1% higher on opening.

The US dollar hit the highest level in two decades, driven by weakness in the yen and the euro as well as risk-off sentiment which has driven flows towards the greenback.

Victoria Scholar, head of investment, Interactive Investor said: "USD is on track for its best monthly gain since May 2012 as traders bet on a faster path towards tightening from the Fed as well as concerns about a slowing US economy after weaker-than-expected GDP data raised questions about the possibility of a US recession.

"Having rallied by nearly 10% since the January trough, the next major resistance hurdle is at 104 for the dollar basket with a break above potentially paving the way for further gains.”

Read more: Over half of UK firms to raise prices as inflation bites

On Thursday, America’s economy shrank unexpectedly in the first quarter of the year, contracting by 0.4% in the first quarter, or 1.4% on an annualised basis. This was the weakest quarter since the start of the pandemic in 2020.

Equity markets in Asia pushed higher on Friday, taking their lead from Wall Street, but traders are still cautiously optimistic due to the ongoing Ukraine war, soaring inflation, US interest rate hikes and China's lockdowns.

The Hang Seng (^HSI) surged 3.3% in Hong Kong, and the Shanghai Composite (000001.SS) rose 2.4%. In Japan, the Nikkei (^N225) climbed 1.8% on the day.

Watch: What are SPACs?

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