European stock markets fell on Tuesday as improving economic activity in the euro zone fuelled speculation that the European Central Bank may have more room to raise interest rates to curb inflation.
The pan-European index STOXX 600 It lost 0.2% but closed far from its session lows.
Data showed euro zone business activity surprisingly returned to growth in January, adding to signs that the bloc’s slowdown may not be as deep as feared and that the monetary union could escape recession.
Hopes of a milder recession in the euro zone and lower interest rate hikes by the Federal Reserve have boosted European equities this year. The STOXX 600 is up 6.7% so far in 2023, beating the U.S. benchmark’s 4.5% annual rise. S&P 500.
Euro zone government bond yields fell on the back of business activity data as investors tried to assess the ECB’s future path of monetary tightening.
Although the ECB has raised rates at the fastest pace in its history, it has so far failed to bring inflation closer to its 2% target.
Hardline comments from ECB officials have helped consolidate bets of 50 basis point interest rate hikes at each of its next two meetings, one of which is scheduled for next week.
The U.S. economy also showed signs of improvement, with business activity slowing slightly in January, though it contracted for the seventh straight month.
Among the STOXX 600 sectors, healthcare and energy stocks led the declines, with declines of more than 1% each.
Gains in the financial sector limited losses, as banks rose 0.6%, while industrial stocks linked to the economy also rose 0.9%.