Similar to other major global markets, European equities also experienced a heavy correction. Worries over inflation, more restrictive monetary policies, the Ukrainian conflict, as well as recession, haunted markets. Over the month of June, STOXX 600 index lost 8.15% (10.28% in US$ terms).
Inflation remained an issue in Europe, as the June Eurozone CPI print came in at 8.6%, setting another record high in history. In order to reign in the inflation, ECB president Christine Lagarde noted that the Bank is ready to move rates at a faster pace if the situation calls for it. At the moment, markets are pricing in a total of 75 bps in rate hikes before September, which will bring the European interest rates back to positive territory for the first time since 2014. The drastic shift in the monetary policy will likely put pressure on both valuation levels, as well as corporate fiscal health, hindering future economic growth.
As for fundamentals, European economic conditions appears to be at the worst in recent years. According to Markit, manufacturing output fell for the first time since the start of the epidemic, hitting a 24-month low. Given the Russian oil sanctions will likely be in effect by the end of the year, Europe could face the further threat from Russian gas being cut off. With recessionary risks higher, while continue monitoring other recessionary indicators, investors should also avoid adding exposure to this market as the downside risks far outweigh the upside potential.
