Summary

• European stocks declined due to central bank moves and bank earnings.
• The Stoxx 600 Index is still up 6% in January, due to hopes of improving economic indicators.
• Policy decisions from ECB, BOE, and Fed are being closely watched to control inflation and avoid earnings downgrades.

European stocks declined on Tuesday, reducing one of the strongest starts to the year on record, as investors prepare for potential interest rate hikes from central banks and digest bank earnings. The Stoxx Europe 600 Index was down 0.7% by 10:18 a.m. London time.

UBS Group AG saw a decline due to weak equities and wealth management sales, while UniCredit SpA had gains after better-than-expected profits and shareholder returns driven by higher interest rates. Swedbank AB also saw gains after its update. Commodity stocks fell due to declines in oil and base metals, while consumer staples and utilities outperformed.

Investors have taken profits from the strong rally in European equities, which has outperformed US peers. The Stoxx 600 Index is still up 6% this month, set for its biggest January gain since 2015, due to hopes of easing inflation and declining gas prices and China's economic reopening. The Euro Stoxx 50 gauge is up 9% this January, a record start to the year.

Money managers are now looking ahead to policy decisions from the ECB, BOE, and Fed, as they try to control inflation. Yesterday's data showed Spanish inflation unexpectedly quickened in January ahead of the ECB's update, while Tuesday's data showed the euro-area economy grew in Q4 and France avoided contraction. However, some fear earnings downgrades as a recession takes hold.

"Consensus numbers are lagging behind," says UBS strategist Sutanya Chedda, who sees signs of weakening profit margins. "We expect companies to move from pricing power to demand weakness,” she added. According to Citigroup strategists, Eurostoxx 50 positioning is now the most bullish since mid-2021, but momentum has slowed in the second half of January.