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Stock markets across Europe turned choppy on Tuesday, slipping from early gains as investor optimism about the economic outlook faltered.

The Stoxx 600 index was up 0.34% in afternoon trading, with retail stocks gaining 1.25% while tech stocks fell 0.7%. The index had risen on Monday as signs of cooling inflation in China buoyed commodity prices and mining shares.

All eyes are now on key U.S. inflation data due later this week, with the latest Consumer Price Index figures scheduled for Wednesday and the Producer Price Index on Thursday. The data will provide critical insight into whether the Federal Reserve’s aggressive interest rate hikes are beginning to tame spiraling prices.

Meanwhile in China, a raft of economic releases on Friday — including metrics on unemployment, industrial production, retail sales and housing prices — could offer clues on the extent of the downturn in the world’s second-largest economy.

The European Central Bank’s next policy meeting is also slated for Thursday, where officials are widely expected to raise rates by 25 basis points to 4.0% as they combat stubbornly high inflation. But economists say it is still a close call whether the ECB will opt for a larger 50 basis point hike, per Reuters.

The ECB and other major central banks have been raising rates aggressively this year to rein in inflation that has surged to multi-decade highs following Russia’s invasion of Ukraine. Investors are hoping signs of peaking prices could pave the way for a pause in tightening monetary policy.

Smurfit Kappa Plummets 10% on WestRock Merger

Shares of Dublin-based Smurfit Kappa, Europe’s largest paper and packaging producer, plunged 10% after announcing a transatlantic merger with U.S. rival WestRock.

The deal will create a packaging behemoth called Smurfit WestRock, which will rank among the world’s largest paper and packaging firms with a primary New York Stock Exchange listing and a standard listing in London.

Smurfit Kappa CEO Tony Smurfit, who will lead the merged entity, said the New York listing made sense given an expected 65% of revenues originating from the U.S. and Latin America. He also cited the “deeper pool of capital” available in the U.S. for companies of this size.

Under terms of the agreement, WestRock shareholders will receive one share of the new company plus $5 cash for each WestRock share — equivalent to $43.51 per share. Smurfit Kappa investors will receive one share of Smurfit WestRock for each existing share.

Analysts at JP Morgan and Jefferies stated the takeover premium was higher than many Smurfit shareholders anticipated, per Reuters. The deal is slated to close in Q2 2024 following shareholder and regulatory approvals.

UK Unemployment Rises While Wage Growth Holds Steady

The UK jobless rate increased 0.5 percentage points to 4.3% between May and July, official data showed on Tuesday. The figure aligned with economist forecasts.

The employment rate edged up 0.1 points to 21.1%, driven by a rise in 16–24 year olds finding work. The number of people classified as economically inactive due to long-term sickness also hit a new record high.

Closely watched wage figures showed annual pay growth excluding bonuses held steady at 7.8% — the highest on record. The data will be scrutinized by the Bank of England as it weighs further rate hikes to control inflation.

“The tightness of the labour market continued to ease in July,” noted Ashley Webb, UK economist at Capital Economics. “But the further rise in wage growth will only add to the Bank of England’s unease and supports our view that the Bank will raise interest rates once more, from 5.25% currently to a peak of 5.50%, next week.”

Oil Prices Inch Up On Supply Worries

Oil prices edged higher on Tuesday morning amid worries over tight supply. October WTI crude futures rose 0.84% to $88.02 a barrel, while Brent crude for November delivery gained 0.7% to $91.28.

Prices drew support after several key Libyan export terminals were shuttered due to bad weather. Investors are also awaiting OPEC’s monthly oil market report for clues on production levels.

Uncertainty over supply cuts just announced by Saudi Arabia added to anxiety over global output. Traders are additionally focused on the upcoming U.S. inflation statistics and the potential impact on oil demand.

Packaging Heavyweights Smurfit Kappa and WestRock Agree to $18 Billion Merger

Smurfit Kappa and WestRock, two giants in the paper and packaging industry, announced Tuesday they have agreed to combine in an $18 billion merger deal.

The unified company, to be called Smurfit WestRock, will operate via a new holding entity headquartered in Dublin, Ireland with its North and South American HQ in Atlanta. The CEO role will go to Smurfit Kappa’s Tony Smurfit.

Per Smurfit Kappa, the merger is “expected to be high single digit accretive” to earnings per share excluding synergies, and “in excess of 20% including run-rate synergies by the end of first full year following completion”.

U.S.-based WestRock investors will receive one share of the new firm plus $5 cash for each existing share, working out to around $43.51 per WestRock share. Smurfit Kappa shareholders get one share in Smurfit WestRock for each current share held.

The deal is anticipated to close in Q2 2024 pending approvals. It will combine Smurfit’s strong European operations with WestRock’s significant U.S. and Latin American footprint.

Some Luxury and Travel Stocks Appear Attractively Valued

Michael Field, European equity strategist at Morningstar, sees select opportunities arising in beaten-down luxury and travel stocks.

With luxury shares under pressure amid fears over a slowdown in China, Field believes valuations now better reflect the risks. “We’re starting to see really attractive opportunities open up,” he noted.

Field is also turning optimistic on pandemic-hit travel names like aircraft engine maker Rolls Royce as air traffic recovers. “We think there’s value starting to emerge in some of those recovery names, recovery plays, and those stocks that were really hit hard by the pandemic,” he said.

Even after the recent pullback, equity valuations remain stretched overall, meaning investors need to be selective in the current environment, Field added.

UK Jobs Data Suggests Lower Wage Pressures Ahead

Despite steady headline wage growth, Tuesday’s UK labour market report points to easing pay pressures, according to James Smith, developed markets economist at ING.

Smith noted private sector pay excluding the public sector was nearly flat between June and July. Also, a separate payroll-based earnings metric fell for the second straight month.

While Smith cautioned against reading too much into one month of data, he said the softness aligns with other signs of a cooling labour market. This could ease the pressure on the Bank of England to continue hiking rates aggressively.

ING still expects a September rate rise but believes that will be the last, with the Bank likely pausing at 5.50%, per Smith.

Some Wall Street Strategists See Fed Ready to Slow Rate Hikes

According to a Wall Street Journal report on Sunday, consensus is building among Fed officials to potentially pause rate increases after one or two more hikes.

The shift indicates cooling conviction within the Federal Open Market Committee that aggressive tightening is needed to control inflation, as recent data shows price pressures may be easing.

While a rate hike at next week’s FOMC meeting still appears likely, officials seem to be growing more concerned about overtightening than undershooting on inflation, marking a noteworthy change in mindset.

Market odds point to a 44.6% probability of a final 2022 rate increase in November, based on CME Group data. The Fed’s hawkish stance has been a major headwind for stocks this year. More caution could pave the way for a market rebound.

In Closing

After starting strong on Tuesday, European equities turned choppy as optimism over the economic outlook faltered. Lingering inflation concerns and worries over a slowdown in China weighed on sentiment.

The day’s biggest story was Smurfit Kappa’s deal to merge with U.S. peer WestRock in a transformational $18 billion union. Smurfit shares plunged on the news.

Macro developments investors are watching include U.S. inflation readings this week and upcoming Chinese data. The policy meetings of the Fed and ECB also loom large.

While risks remain tilted to the downside, any signs inflation may be peaking could spark hopes central banks can pull back on aggressive tightening. This may be needed to avert a hard landing.

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