European equities moved lower on Tuesday as elevated energy prices, political uncertainty in Germany and caution ahead of key U.S. inflation data weighed on investor sentiment.
Markets were also looking ahead to Thursday’s European Central Bank meeting, where an interest-rate increase is expected.
The pan-European STOXX 600 fell 0.4% to 647.12 after finishing broadly unchanged on Monday. Germany’s DAX declined 0.6%, France’s CAC 40 lost 0.5% and the UK’s FTSE 100 slipped 0.3%.
German Political Developments Pressure Sentiment
Political uncertainty in Germany increased after the far-right AfD secured a historic victory in a state election, adding another source of caution for investors.
German Chancellor Friedrich Merz said he was “deeply shocked” by the result.
“Not only did something change in Saxony-Anhalt yesterday but throughout all Germany. It will have repercussions, including on the international stage,” Merz said.
The political developments came alongside fresh economic data showing weaker German trade activity.
Exports declined 0.8% month-on-month in July, reversing a 0.9% increase in June, according to Destatis. It marked the first monthly decline in exports since January.
Imports fell more sharply, dropping 5.7% after increasing 4.5% in June. As a result, Germany’s trade surplus widened by more than expected despite the decline in exports.
ECB Decision and U.S. Inflation Data in Focus
Investors remained cautious ahead of the ECB’s policy decision on Thursday, with markets expecting policymakers to raise interest rates.
Attention is also turning toward upcoming U.S. consumer price inflation data, which could influence expectations for Federal Reserve monetary policy and global bond yields.
Elevated energy prices are adding another layer of uncertainty for European markets by increasing concerns that inflation could remain persistent and put additional pressure on corporate costs.
Dunelm Slides While Sandoz Advances
Among individual stocks, James Fisher and Sons shares fell 1.5% after the British marine services company reported modest first-half revenue growth.
Dunelm Group (LSE:DNLM) dropped 12% after the homewares retailer said unusually hot weather and weak consumer confidence had affected trading at the beginning of its new financial year.
Sandoz (LSE:0SAN), meanwhile, gained 3% after the Swiss pharmaceutical company announced plans to invest around $300 million in a new biosimilar manufacturing facility in Ljubljana, Slovenia.
The combination of political uncertainty, higher energy costs and upcoming monetary policy and inflation events kept investors defensive across European markets.
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