Fear of ECB Tightening Grows as European Stock Futures Drop

European stock markets should begin lower on Tuesday; owing to concerns about possible monetary policy tightening to battle inflation and political upheaval in the United Kingdom.

The DAX futures contract in Germany was down 0.8 percent at 2 a.m. ET (0600 GMT), France’s CAC 40 futures contract was down 0.6 percent; the FTSE 100 futures contract in the United Kingdom was down 0.4 percent. The hawkish action by Australia’s central bank earlier Tuesday, hiking interest rates by the highest in 22 years and hinting at further tightening to come as it tries to contain soaring inflation, should impact European shares. The Reserve Bank of Australia raised its cash rate by 50 basis points to 0.85 percent, a more significant tightening than many investors had expected, resulting in a 1.5 percent decline in the S&P/ASX 200, Australia’s primary market index.

ECB Decision Decides the Market Outcome

The European Central Bank meets on Thursday; it was widely believed that the meeting would be used to confirm that rate rises will occur in the third quarter. However, fears are rising that policymakers would choose a more aggressive tightening path than ECB President Christine Lagarde envisaged only a few weeks ago, particularly after Eurozone CPI hit a new high of 8.1 percent in May. Lagarde proposed that the central bank begin raising its deposit rate; which is now at -0.5 percent, in July, to hit zero or “slightly over” by the end of September before moving “towards the neutral rate.”

The UK market will also be in focus on Tuesday; Prime Minister Boris Johnson survived a no-confidence vote from his legislator; however, he now faces a difficult struggle to regain the trust of his party and country. Johnson won 211 to 148 votes, a lower margin than when the same MPs sought to dismiss his predecessor, Theresa May; who won her vote but resigned six months later. Services provided by the United Kingdom the PMI data will come later in the day.