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European stock markets stage late recovery as eurozone inflation hits 5%

European stock markets were fairly muted on Thursday
European stock markets were fairly muted on Thursday as traders awaited the latest inflation data from the eurozone. Photo: Andre Pain/AFP via Getty Images

European stock markets ended mixed on Thursday as traders digested the latest inflation data from the eurozone.

In London, the FTSE 100 (^FTSE) closed 0.1% lower, paring back deeper losses during the session, while the French CAC (^FCHI) was climbed 0.3%, and the DAX (^GDAXI) was 0.5% higher in Frankfurt after spending most of the day in the red.

It came as the euro area annual inflation rate rose to 5% in December, from 4.9% in November, thanks to soaring energy and food prices. In the wider European Union (EU), prices rose by 5.3% in the year to December.

Energy prices were the biggest factor in the rise, surging a staggering 25.9% year-on-year as gas and electric bills hit households, while food, alcohol and tobacco was up 3.2%.

Industrial goods prices also rose 2.9% over the 12 months, and services went up 2.4%, the data showed.

However, Christine Lagarde, president of the European Central Bank (ECB), said that inflation in the eurozone will decrease gradually over the year as its main drivers, such as surging energy prices and supply bottlenecks, are expected to ease.

"This will stabilise and ease gradually in the course of 2022," she said.

Watch: What is inflation and why is it important?

But on Wednesday, Bank of England (BoE) governor Andrew Bailey warned the opposite, cautioning that UK inflation pressures may last longer than initially thought.

He told the Treasury Select Committee that financial markets do not expect energy prices to start easing back until the second half of 2023.

It came as UK inflation soared to a 30-year high of 5.4% in December, meaning prices are rising faster than wages.

“Concerns over rising inflation remain as real as ever, along with worries about how much damage consistently higher prices could do to consumer confidence, as well as wider demand,” Michael Hewson of CMC Markets said.

Read more: Primark to cut 400 jobs in UK stores

Across the pond, the S&P 500 (^GSPC) rose 1.4% and the tech-heavy Nasdaq (^IXIC) climbed 1.8%. The Dow Jones (^DJI) edged 1.2% higher at the time of the European close.

It came as more Americans filed new unemployment claims last week, after the Omicron variant hit the US economy, according to Labour Department figures.

The number of ‘initial claims’ for unemployment benefit jumped to 286,000 in the week to 15 January, the highest level since October. This marked an increase on the 231,000 initial claims filed in the previous week.

Initial claims fell to their lowest since 1969 late last year, as the tight labour market encouraged firms to hold onto staff.

On Wednesday, stocks on Wall Street, despite trying to rebound, were unable to hold onto their gains. They slid lower despite US treasury yields coming off their highs of the day to finish lower.

"So far this year, volatility has been quite high as investors respond to high levels of inflation around the world, central bank policy tightening and another wave of coronavirus," Fawad Razaqzada, analyst at Think Markets, said.

"We have seen some global indices fall sharply, especially in the US, while others have continued higher or consolidated. US technology and small cap shares have taken the brunt of the sell-off due to rising bond yields, while banks and industrials have outperformed.

"So, it has been quite a mixed start to the new year. With some of the major indices now testing key support levels, it is possible we may be heading for a period of relative calm as dip buyers take advantage of downbeat stocks and sectors."

Read more: What higher inflation means for savers and investors

Meanwhile, markets mostly rose on Thursday in Asia as investors tentatively returned to buying after recent losses.

In Japan, the Nikkei (^N225) climbed 1.1%, while the Shanghai Composite (000001.SS) dipped 0.1% lower. The Hang Seng (^HSI) powered 3.2% higher in Hong Kong thanks to a tech rally, while property firms also enjoyed healthy gains.

Stocks were also boosted by China cutting another two key lending rates to help support the wider economy.

On Thursday, the People's Bank of China (PBOC) cut its five-year loan prime rate, the reference rate used for mortgages, from 4.65% to 4.6%.

It marked the first reduction since April 2020, at the height of the pandemic in China.

The PBOC also cut its benchmark lending rates for corporate and household loans for the second month in a row.

Watch: What are SPACs?