European stocks inched lower on Tuesday, as investors weighed the prospect of an escalation of sanctions against Russia, including a potential ban on the country’s coal and oil imports.
The regional Stoxx 600 gauge lost 0.1 per cent, after making small gains earlier in the session. Germany’s Dax lost 0.5 per cent, while London’s FTSE 100 dipped 0.1 per cent. Futures contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 index both fell 0.3 per cent.
The moves came after the US and France called for a significant escalation of punitive measures against Russia, following reports of atrocities by its forces in Ukraine.
French president Emmanuel Macron urged a ban on imports of Russian oil and coal, though he did not call for a ban on imports of Russian gas — a crucial fuel source for Germany, Italy and some eastern European countries. US president Joe Biden said he would “continue to add more sanctions” on Russia and called for a trial to assess possible war crimes committed by President Vladimir Putin’s forces in Ukraine.
Oil prices rose on Tuesday, with Brent crude, the international benchmark, adding 0.9 per cent to $108.43 a barrel. Futures contracts linked to TTF, Europe’s wholesale natural gas price, were 2.8 per cent higher at €111.7 per megawatt hour.
Tancredi Cordero, founder of Kuros Associates, said the German economy “in particular will see its average input costs, when it comes to energy and commodities, rising considerably, which will dent operating margins of most domestic companies”.
“I don’t think there will be a recession [in Germany], it’s too strong an economy,” he added. “But in the short term, Germany will be reduced in terms of exposure by institutional investors.”
If not a full-blown recession, Europe could instead be set for a prolonged bout of stagflation, said Florian Ielpo, multi-asset portfolio manager at Lombard Odier Investment Managers, referring to a period of simultaneous high inflation and muted economic growth.
“This isn’t necessarily bad for equities,” he said. “If you’re a company [secure enough] in your market to be able to push the surge in costs to consumers, you’re not really likely to suffer at the beginning of the inflation surge, and we’re still at the beginning.”
Supply-chain disruptions sparked by Russia’s invasion of Ukraine in February have added to concerns about persistently high levels of global inflation, with analysts expecting central banks to tighten monetary policy further in response.
Data released on Tuesday showed that rising prices for energy and food pushed inflation to a 30-year high in February across the OECD group of rich countries. The annual rate of consumer prices across the 38 member countries rose 7.7 per cent, up from 1.7 per cent a year before.
In government debt markets, the yield on the 10-year US Treasury note — which moves inversely to its price and is a benchmark for borrowing costs worldwide — added 0.06 percentage points to 2.47 per cent.
Germany’s sovereign bonds also came under pressure, with the yield on the 10-year Bund adding 0.04 percentage points to 0.56 per cent. The UK’s equivalent gilt yield added 0.08 percentage points to 1.63 per cent.
Elsewhere in equity markets, Japan’s Nikkei 225 stock index closed 0.2 per cent higher, while the broader Topix index fell 0.2 per cent. Markets in China and Hong Kong were closed on Tuesday for a public holiday.
