EUROPE MARKETS: European Stocks Drop As Tamer U.S. Inflation, Trump Administration Drama Drive Euro Higher

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03/13/2018 | 04:57 pm

By Carla Mozee, MarketWatch

U.K. growth forecast raised slightly for 2018

European stocks fell into the red Tuesday, hurt as the euro and the U.K. pound rose against the U.S. dollar on easing concerns that the Federal Reserve will raise borrowing rates by more than anticipated this year.

Stocks throughout the region had been largely kept aloft by well-received financial updates from German utility E.ON and others before investors juggled expected economic updates from the U.S. and the U.K. Market attention was also on the unexpected timing for the firing of U.S. Secretary of State Rex Tillerson .

How markets are moving

The Stoxx Europe 600 index fell 0.3% to 377.92, led down by the telecom and consumer-goods sectors. But the utility and oil and gas groups were modestly higher. On Monday, the pan-European index rose 0.3% as a complex deal between German utilities lifted that sector.

Germany's DAX 30 index lost 0.6% to 12,343.47, as only two components moved higher. The U.K.'s FTSE 100 indexdropped down by 0.6% to 7,173.52.

France's CAC 40 index reversed course and fell 0.1% to 5,273.41. But Spain's IBEX 35 held to a rise of 0.1% to 9,742.70.

The euro bought $1.2373, up from $1.2337 late Monday in New York.

What is driving the market

Investors dragged European stocks lower as the both the euro and the pound climbed against the greenback . The euro hit an intraday high of $1.2386, the strongest since March 7, according to FactSet data, while the pound reached a two-week high at $1.3971.

Euro strength can pressure revenue for European exporters as it makes their goods and services more expensive to purchase for overseas buyers and hurt their earnings. Sterling strength can eat into earnings made by multinational companies that weigh heavily on the FTSE 100. Among euro companies that can be sensitive

The dollar fell after the U.S. consumer prices index in February rose 0.2%, matching expectations. That reading tamped down concerns that the Fed will raise interest rates four times in 2018 instead of three as previously expected. That implies a rise in the costs of borrowing for companies worldwide. Higher interest rates can attract investors to a country's currency.

The U.S. annual inflation rate is running at 1.7%. Some questions about the rate of inflation and the pace of rate hikes were raised by Friday's U.S. jobs report, which showed a subdued rate of wage growth. The eurozone's final reading of consumer price inflation for February is scheduled for release on Friday.

As that report was released, Britain's Chancellor of the Exchequer Philip Hammond in his Spring Statement said the Office for Budget Responsibility raised its 2018 forecast for U.K. economic growth to 1.5%. That's modestly higher than the previous estimate of 1.4%. Hammond also said U.K. inflation will move toward the 2% target over the next 12 months. U.K. inflation currently stands at 3%.

What strategists are saying

"Sterling was buoyed by a trifecta of events unfolding consecutively at lunchtime today," including the U.S. inflation data and the Spring Statement that showed improvement in the U.K. economy. said Hamish Muress, currency analyst at OFX.

"Finally, and most crucially, [U.S. President] Donald Trump announced that he had fired his U.S. Secretary of State Rex Tillerson, replacing him with CIA director Mike Pompeo. It was this final event that caught the market unaware and has caused the U.S. dollar to suffer loses across the board," said Muress.

"Many analysts have suggested in the last week that political risks have largely subsided in the U.S. as Trump has backed away from sweeping steel and aluminium tariffs, but today's event goes to show how quickly things can change in Washington," he added.

Stocks in focus

E.ON SE shares (>> company sheet) jumped 4.8% as the German utility said it will raise its dividend, and said it swung to a yearly net profit of EUR3.93 billion ($4.85 billion), aided by a reduced tax rate. E.ON also expects to cut around 5,000 jobs during the integration of Innogy SE , which it will take over through an asset-swap deal with RWE AG.

RWE turned lower, losing 1.7% after the utility said it swung to a 2017 net profit .

Actividades de Construccion y Servicios SA (>> company sheet) gave up gains of more than 2% and fell 0.3% in Madrid. The shares had risen following reports late Monday the company and Italy's Atlantia are close to reaching a preliminary deal to take joint control of Spanish infrastructure firm Abertis Infraestructuras . Reuters ( quoted two Italian sources as saying an agreement is near.

Antofagasta PLC shares rose 2.7% after the copper producer posted a more than fourfold rise in 2017 net profit .

TP ICAP PLC (TCAP.LN) fell 8.6%, trading at the bottom of the Stoxx 600, as the interdealer broker posted a decline in 2017 pretax profit , to GBP72 million ($99.9 million) from GBP167 million a year ago.

Iliad SA shares (>> company sheet) sank 9.2%, with the French telecommunications company's 2017 earnings report showing net profit was essentially flat despite a 5.6% rise in revenue that was largely driven by its mobile business.

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