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- Inflation in the euro zone ticked up 0.4% in June to reach 4% year on year, twice the European Central Bank's (ECB) stated target. Despite the easing of commodity prices that provided a breather for other central banks, the ECB was forced to raise interest rates for the first time in over a year, adding 0.25% to take interest rates to 4.25%. European business sentiment was quick to respond. Germany’s Ifo survey fell to its lowest level since December 2005, while similar surveys in France and Italy also turned down in June.
- Outside of the euro zone Norway's central bank was also forced to raise rates by 0.25% to 5.75% as concerns over rising inflation outweighed worries of a slowing economy.
- European markets suffered in line with their peers in July with the FTSE AW Europe ex UK Index falling around 1.5% compared to loss of almost 2% by the FTSE All-World Index in local currency terms. Among Europe’s larger markets, Germany and Spain fared best delivering small negative returns in local currency terms. France lost closer to 1.5% while Italy's local market fell just under 4%.
- The sudden cooling of oil and other commodities prices was the most notable influence on European market returns. This translated into more than a 3.5% loss for the UK, a fall of 9% for Norway and just over 14% for Russia in local currency terms. While a number of consumer facing sectors also suffered, the month saw Europe's banks at last begin to recover some lost ground while more defensive areas such as pharmaceuticals and telecoms also generally progressed. It was chiefly these sectors that enabled Sweden's market to deliver a small positive while Denmark’s losses were limited to 1.5%. The same sectors helped deliver well over 10% in the Polish market and over 23% in Turkey, the top performing European market in July.
- In fixed income, returns from euro zone and UK bonds were positive across all maturities, with long-dated securities comfortably outperforming short-dated debt as inflation concerns subsided across the region.
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