Following concerns over U.S. tariffs set to be imposed on certain nations, which have caused market volatility, inflation fears are once again on the rise. Not only are inflation concerns growing in Europe and the U.S., but China has also reported a five-month high in its inflation rate for January.
Already on Friday, European and American stock markets saw significant declines. Some optimistic market participants view this as merely a small correction following strong gains, while more pessimistic investors see it as the beginning of a larger downward movement. The EuroStoxx 50, for example, dropped nearly 0.6% on Friday, the British FTSE 100 fell by 0.3%, and the German DAX lost 0.5%. A cross-section of European stock indices thus paints a negative picture, and the downward momentum from Friday could very well continue into the first half of the week. The key question will then be whether the downward trend accelerates or if the bulls manage to establish a safety net, allowing stock markets to rebound.
A look at the widely followed Fear & Greed Index currently suggests that the markets have not yet reached a point where a major downturn is imminent. The index currently sits in the "Fear" zone, which indicates that markets could still turn back upward.
Euro Investors Fear Large Interest Rate Gap with U.S. Dollar
As stock markets declined towards the end of the week, the U.S. dollar strengthened against the euro— or, put differently, the euro once again started heading south. Market participants increasingly expect a growing interest rate differential between the U.S. dollar and the euro. This assumption was reinforced by U.S. labor market data released on Friday.
Should the proposed tariffs also affect Europe, the European Central Bank (ECB) might react out of fear of potential deflation by cutting interest rates more aggressively than initially expected. This could cause the interest rate gap between the U.S. and the eurozone to widen further.
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