European equities were subdued on Wednesday, holding close to record highs as a six-session advance in crude oil and worsening tensions in the Middle East kept investors cautious ahead of a crucial US inflation report.
The pan-European Stoxx Europe 600 Index edged 0.1% higher, with major regional markets showing similarly limited moves. Germany’s DAX gained 0.2%, France’s CAC 40 moved 0.1%, while London’s FTSE 100 was virtually unchanged.
Economic figures from Europe offered some stability before attention shifted towards the US data. Final inflation readings for July confirmed annual headline consumer price growth of 2.8% in both Germany and Italy. However, those figures were overshadowed by renewed volatility in energy markets, with crude oil recording its longest run of consecutive gains since late April.
Brent crude climbed towards $89 a barrel as the conflict involving Iran and shipping routes through the Persian Gulf showed little sign of easing. Despite repeated claims from U.S. President Donald Trump that a peace agreement was close, negotiations appeared to have reached a deadlock.
Prospects for a diplomatic breakthrough weakened further after Trump introduced tougher counter-conditions, including a demand for Tehran to pay direct compensation related to the conflict. Iran responded by warning that the Strait of Hormuz would remain closed until Washington satisfied its demands.
Tensions at sea also intensified after Yemen’s Iran-aligned Houthis carried out fresh attacks against military supply vessels.
The continued increase in energy and other input costs adds another challenge to an already uncertain economic environment, with investors now turning their attention to Wednesday’s US Consumer Price Index report.
The inflation figures are particularly important because of the increasingly difficult policy decision facing the Federal Reserve. Last week’s unexpectedly weak US employment report showed the economy lost 23,000 jobs in July and included substantial downward revisions to previous figures. Following the report, market-implied expectations for a September Fed rate increase fell to around 45%, compared with 67% beforehand.
A weaker-than-anticipated inflation reading could reinforce expectations that slowing labour demand is helping bring price pressures closer to target, potentially allowing central banks on both sides of the Atlantic to keep interest rates unchanged into the autumn.
In contrast, stronger inflation driven by persistent energy and services costs could increase concerns about “stagflation,” a scenario in which policymakers are forced to maintain elevated borrowing costs even as economic growth deteriorates.
Despite Wednesday’s cautious trading, the STOXX 600 has gained approximately 11% since the beginning of the year, highlighting the resilience of European equities following a particularly volatile July.
The index has advanced 1.75% so far in August, although that trails the roughly 3% rise recorded by the S&P 500 Index over the same period.
US markets have benefited significantly from gains among mega-cap technology companies and artificial intelligence-related stocks. European indices, by comparison, have greater exposure to industrial, automotive and consumer discretionary companies, leaving them more sensitive to weak regional growth, tariffs and rising raw-material costs.
The approaching end of the second-quarter earnings season is also reducing one source of support for European equities.
Corporate results have helped underpin markets during the past month, with aggregate STOXX 600 earnings showing growth of almost 21% year-on-year. Banking groups have benefited from healthy net interest margins, while defence and power-grid infrastructure companies have experienced strong demand.
However, most European companies have now released their quarterly results. As a result, the flow of positive earnings surprises that helped support equities through late July is fading, increasing the market’s dependence on economic data and geopolitical developments for its next significant move.
European stocks on the move
Among individual companies, Vestas (TG:VWSB) surged 15% after upgrading its full-year earnings outlook.
Bilfinger (TG:GBF) dropped more than 6% following the release of its second-quarter results, while Balfour Beatty (LSE:BBY) climbed almost 10% after raising its profit forecasts.
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