Europe’s recession may not be as bad as feared

By Anna Cooban, CNN

European stocks are pushing higher for the third straight day as investors cheer signs that inflation, supply chain bottlenecks and natural gas prices are all easing

Europe’s Stoxx 600 index rose 1% in Wednesday trading, and is now up 3.3% since markets kicked off 2023 trading on Monday. Germany’s DAX rose 1.8% on Wednesday, while France’s CAC gained 1.9%. London’s FTSE 100 index also gained 0.4%.

Despite the undeniably gloomy outlook for the global economy — the International Monetary Fund expects one third of economies to fall into a recession this year — investors in European stocks are feeling cautiously optimistic following the release of a string of better-than-expected data indicating that the slowdown might not be as deep as once feared.

On Wednesday, France’s statistics institute said consumer price inflation was 5.9% in December, down from 6.2% in November. A drop in energy prices drove the decline, the institute said.

In Germany, Europe’s biggest economy, provisional data released on Tuesday showed that inflation had fallen to 8.6% in December, from 10% the month before. A one-off government payment to households to subsidize energy bills helped bring prices down.

Weaker inflation is raising hopes among investors that the European Central Bank may be able to hike interest rates less aggressively this year, after increasing the cost of borrowing four times in a row since July 2022.

And business activity across the 20 countries sharing the euro currency, while historically still low, ticked up in December from the month prior, according to a survey of companies released by S&P Global on Wednesday.

That adds to promising survey data released on Monday, also from S&P Global, showing that supply chain pressures and inflation for the region’s manufacturers appear to be easing up.

Chris Beauchamp, chief market analyst for IG, an online trading platform, told CNN that the boost for markets is partly due to the slowdown in inflation.

“It seems that investors are being tempted back now that the [Russia-Ukraine] war has been contained, and the worst of the sanctions discussions appear over for the time being,” he added.

Traders aren’t so cheery across the pond. The S&P 500 was down 0.4% at the close of trading Tuesday and the Dow ended little changed, despite rallying in the morning. US futures were up slightly on Wednesday morning, but still trailing markets in Europe.

Wall Street’s relatively sluggish start to the new year may be due to the higher number of poor-performing tech stocks in the United States, according to Beauchamp. The tech-heavy Nasdaq Composite is down 34% from this time last year.

“If we are seeing a continued flight to value, then the relative cheapness of European stocks is a big plus,” he said. “The lack of expensive tech names has been a real boost for the FTSE 100, but other indices in Europe are picking up too.”

An easing energy crisis

High levels of natural gas storage and unseasonably mild weather have put Europe in a stronger position than many feared a few months ago.

Benchmark prices for European natural gas futures have tumbled 10% since Monday to €69 ($73) per megawatt hour. They’re now down 79% since their all-time high in August, when they traded at €342 ($363) per megawatt hour.

European countries raced to fill their gas stores last year as Russia, once their biggest supplier, slashed its exports. Stores are currently filled to 84% of capacity — compared with 52% at the same time last year.

As such, Europe will likely avoid a much-feared energy shortage this winter, though it still faces the task of refilling its storage before next winter’s heating season with little gas now flowing from Russia.

Record-breaking temperatures have helped keep storage levels high. On January 1, at least eight European countries recorded their warmest January day ever, climatologist Maximiliano Herrera told CNN on Tuesday.

Fears about energy supplies that led to significant outflows from European equities last year now seem “unjustified as the risk of a severe energy shortage has diminished,” Deutsche Bank analysts Maximilian Uleer and Carolin Raab wrote in a note on Wednesday.

— Christian Edwards contributed reporting.

The-CNN-Wire
™ & © 2023 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.