European equities moved lower on Tuesday as crude oil prices extended their recent advance and investors assessed expectations for an interest-rate increase from the European Central Bank later this week.
The pan-European STOXX 600 fell 0.2%, with declines across several major markets and sectors, including growth stocks, industrials and consumer discretionary companies.
Germany’s DAX and London’s FTSE 100 both declined 0.2%, while France’s CAC 40 fell 0.4%.
Iranian Threats Add to Oil Supply Concerns
Crude oil benchmarks advanced for a third consecutive session, extending a multi-day increase that has kept Brent crude above $90 a barrel.
The latest move followed statements from Iranian military officials warning that Iran would retaliate against further U.S. or allied strikes by targeting energy infrastructure in the Persian Gulf, including U.S. oil and gas assets in the region.
The statements came as markets continued to monitor disruption around the Strait of Hormuz, a major transit route for global energy supplies.
For European companies and economies that depend on imported energy, sustained increases in oil prices could raise input costs and contribute to inflation. The extent of any effect on corporate earnings or economic activity will depend on the duration and scale of the increase.
Markets Price in ECB Rate Increase
Investors were also preparing for Thursday’s European Central Bank Governing Council meeting.
Money markets were pricing in a high probability of a 25-basis-point interest-rate increase.
Expectations for higher rates followed preliminary August Eurozone inflation data showing headline consumer prices rising 3.3% year-on-year. Energy prices increased 14.3%.
With energy prices continuing to rise, some investment banks, including Deutsche Bank, have begun factoring in the possibility of additional ECB tightening after September, including another increase before the end of the year.
German 10-year Bund yields were trading near multi-year highs of 3.36%. Higher bond yields can increase borrowing costs for companies and affect the relative valuations of equities and fixed-income assets.
U.S. CPI Data Could Influence Federal Reserve Expectations
Investors are also awaiting U.S. Consumer Price Index data scheduled for later in the week.
The inflation report follows U.S. nonfarm payroll figures showing the economy added 162,000 jobs in August.
Markets are assessing whether the inflation data will alter expectations for the Federal Reserve’s Sept. 15-16 policy meeting, including the possibility of a 25-basis-point rate increase.
A higher-than-expected inflation reading could increase market expectations for tighter monetary policy, while softer inflation could reduce expectations for additional rate increases. The eventual policy decision remains subject to incoming data and the Federal Reserve’s assessment.
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