European Stocks Retreat as Post-Election Rally Fades, Inflation Data Awaited

European stocks experienced a decline on Tuesday, reaching a two-week low as the initial relief rally following the first round of French parliamentary elections subsided. Investors now await crucial euro zone inflation data for June, which could provide insights into the future path of interest rates.

Market Performance

The pan-European STOXX 600 index dropped 0.6% by mid-morning, with insurers and automakers leading the sectoral declines. France’s blue-chip CAC 40 index also fell 0.7% as investors remained cautious ahead of the second round of voting on July 7. While the initial results showed Marine Le Pen’s National Rally party securing a smaller victory than anticipated, the possibility of a far-right majority remains a concern.

Inflation Data and Interest Rate Outlook

Investors are eagerly awaiting the release of euro zone inflation data for June, with economists expecting a slight easing of price pressures compared to the previous month. German inflation data released on Monday showed a larger-than-expected decline in June, potentially opening the door for another rate cut by the European Central Bank (ECB) in September.

However, ECB President Christine Lagarde indicated that recent benign economic developments suggest that rate cuts are not urgently needed. Pierre Wunsch, another ECB policymaker, echoed this sentiment, stating that while the next rate cut is a relatively straightforward decision, subsequent moves should only occur once inflation is clearly on track towards the 2% target.

Notable Stock Movements

• Sodexo, the French food caterer, fell 5.2% after reporting disappointing third-quarter sales, citing a slowdown in China.
• Siemens Energy rose 3.6% following its announcement to recruit over 10,000 employees by 2030.
• French office services and call center company Teleperformance gained 3.6% after Morgan Stanley initiated coverage with an “overweight” rating.
• Germany’s HelloFresh experienced a significant jump of about 16% following a positive assessment from J.P. Morgan.

Overall, European markets are facing a period of uncertainty as investors weigh the implications of the French election results, upcoming inflation data, and potential shifts in the ECB’s interest rate policy. The market’s performance in the coming days will likely be shaped by these factors and other macroeconomic developments.