European markets fall as UK wage growth wiped out by inflation
European stock markets headed lower on Tuesday after a strong start to the week, with traders digesting the latest UK jobs data.
In London, the FTSE 100 (^FTSE) closed more than 0.5% lower on the day, while the French CAC (^FCHI) tumbled 0.8% and the DAX (^GDAXI) was also 0.8% lower in Frankfurt.
Mining stocks proved to be the biggest drag on the FTSE, along with technology and consumer-focused firms also.
“European markets have opened lower with technology underperforming amid concerns about faster tightening from the Fed and rising yields as Britain’s 10-year gilt yield hits a three-month high and Germany’s 10-year government bond yield rises to the highest since May 2019,” said Victoria Scholar, head of investment at Interactive Investor.
“The FTSE 100 is trading lower amid some profit taking after a strong start to the week, closing Monday’s session at the highest level since January 2020. BP (BP.L) and Shell (RDSB.L) are trading near the top of the index as surging oil prices provide a tailwind for the sector.”
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It came as UK wage growth lagged behind inflation in November, with workers facing a looming cost of living crisis.
According to the latest figures from the Office for National Statistics (ONS), real average weekly earnings fell in November for the first time since July 2020.
Average total pay, including bonuses, grew by 4.2% in the quarter to November, while basic pay without bonuses was 3.8%.
In comparison, consumer price inflation (CPI) soared to 5.1% in November and is forecast to hit as high as 6% this spring when energy bills are set to rise.
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Meanwhile, investor confidence in UK economic growth dropped as inflation and a squeeze on incomes unsettled markets.
According to Hargreaves Lansdown's investor confidence index, confidence in UK economic growth has dropped 2%, while investor confidence in the US has fallen by 3% since November.
Fewer investors believe interest rates will rise in the next six months compared to November, and investor confidence in the UK has increased by 4% since November.
Across the pond, the S&P 500 (^GSPC) dipped 1.7% and the Nasdaq (^IXIC) slumped more than 2%, with tech firms proving a major drag as bond yields surge. The Dow Jones (^DJI) had shed 1.6% at the time of the European close.
US Treasury markets were closed on Monday as a result of the Martin Luther King holiday but yields have jumped across the curve in the Asian session on Tuesday as investors anticipate several US interest rate rises this year.
Two-year yields have risen 6.8bps and above 1% (1.034%) for the first time since February 2020 while 5yr (+7.2bps) and 10yr yields (+5.2bps) have both jumped to the highest level since January 2020.
Asian markets recovered overnight from Monday's slump as investors took some of their lead from Europe with Wall Street closed.
In Japan, the Nikkei (^N225) fell 0.3% despite an early morning rally, while the Hang Seng (^HSI) fell 0.4% in Hong Kong, and the Shanghai Composite (000001.SS) rose 0.8%.
Later on Tuesday, Japanese prime minister Kishida Fumio will address the World Economic Forum’s virtual Davos Agenda.