European Shares Lower on Rates and China Relations

European shares were lower on Monday on fears that the global interest rate cycle could remain higher for longer than previously expected.

After last week’s spy balloon episode, the GER30 index was lower by 0.42%, with traders also worried about relations between the US and China.

Stocks in designer goods were hit, and others were exposed to China. 

GER30 – Daily Chart

GER30 - Daily Chart

The GER30 has remained strong, partly due to the weaker euro versus the dollar and other currencies. 

US data on Friday showed strong US job growth with a rebound in services industry activity last month. Also, restoking fears of higher interest rates two days after Federal Reserve Chair Jerome Powell gave a dovish assessment of the bank’s policy. 

“Equity markets had got ahead of themselves with the softer inflation numbers we had started to see,” said Stuart Cole, a head macroeconomist at Equiti Capital in London. 

“The strong US data has dampened hopes that the Fed – specifically – but also the likes of the BoE and ECB, are as near to ending their policy tightening as the markets had been hoping.” 

The European Central Bank was more hawkish than its peers last week, but they have admitted they will catch up to US rates. 

China accused the US of “overreaction” and the “indiscriminate use of military force” in shooting down a Chinese balloon that was seen moving across the US. The Pentagon has said that the high-altitude balloon was involved in surveillance aircraft until a warplane shot it down on Saturday over the Atlantic Ocean. 

China said that it was a weather balloon that had been blown off course. The country’s vice-foreign minister, Xie Feng, placed a formal complaint with the US embassy on Sunday, accusing Washington of overreacting to an accident “caused by force majeure.” 

“The facts are clear … but the United States turned a deaf ear and insisted on indiscriminate use of force against the civilian airship that was about to leave the United States airspace. It obviously overreacted and seriously violated the spirit of international law and international practice,” Xie said.

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