European stocks struggled to find direction on Tuesday as investors awaited crucial US price data to gauge the Federal Reserve’s policy path, while rising tensions in the Middle East dampened risk appetite. The Stoxx Europe 600, which initially showed gains, erased its early advance, led by declines in travel and leisure shares. US equity-index futures also pared gains after a flat session on Wall Street. Meanwhile, Brent crude oil hovered near $82 per barrel, reflecting concerns over potential Iranian attacks on Israel.
The British pound strengthened, but the FTSE 100 index underperformed Europe’s benchmark after data revealed an unexpected drop in UK unemployment in the second quarter. This development complicates the Bank of England’s potential move to lower interest rates. US Treasuries and the dollar remained steady.
Following last week’s market volatility, attention is now focused on Wednesday’s US consumer price index, which could influence whether the Federal Reserve can achieve a soft landing for the economy. The recent rise in crude oil prices also shifts focus to producer-price numbers expected later on Tuesday, as these will indicate potential inflationary pressures.
“Equity is still in recovery mode after last week’s shakeout,” said Chris Weston, head of research at Pepperstone Group Ltd. “Traders are holding off on significant investments until the key US data is released this week. Pricing US growth remains the primary concern.”
Investors are closely watching developments in the Middle East after the US warned of a possible imminent Iranian attack on Israel. This geopolitical risk was highlighted by Fitch Ratings’ decision to downgrade Israel’s sovereign debt rating from A+ to A, maintaining a negative outlook due to the “continued war” and associated risks.
In Asia, Japanese equities rose after a holiday, bolstered by a weaker yen that supported exporters. The MSCI Asia-Pacific index climbed as much as 1%, recovering from last week’s declines, which had pushed global indexes down and the VIX US volatility index above 65, far above its lifetime average of around 19.5.
Elsewhere in Asia, Chinese regulators instructed commercial banks in Jiangxi province to halt their purchases of government bonds, implementing extreme measures to cool a market rally that has concerned Beijing. This crackdown is starting to impact corporate debt markets, with the average yield for one-year corporate yuan bonds with AA ratings—typically considered junk debt in the onshore market—seeing the largest increase since December 2022.
