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European stocks traded cautiously on Wednesday, as investors continue trying to parse conflicting economic data and worrying signals from around the world.

The pan-European Stoxx 600 index edged up 0.4% in morning deals. Sector performance was mixed, with tech stocks gaining 1% while utilities dropped 0.7%.

Sentiment remained anxious after downbeat U.S. housing and consumer confidence data on Tuesday prompted sharp losses on Wall Street. Meanwhile in Asia, Chinese factory activity surprisingly returned to growth last month.

Traders are assessing how increased central bank hawkishness will impact growth as policymakers fight persistently high inflation. Price pressures show some tentative signs of peaking, but remain uncomfortably elevated.

New U.S. Home Sales Sink to Two-Year Low

All three major U.S. stock benchmarks tumbled Tuesday, led by a 1.5% drop in the tech-heavy Nasdaq, after new home sales plunged 12.6% month-over-month in July. Sales hit the lowest level since early 2016.

Rising mortgage rates and record home prices continue squeezing housing affordability and dampening demand. Compared to last year, new home sales sank nearly 30% in July.

The Conference Board’s consumer confidence index also unexpectedly deteriorated in September, pointing to growing pessimism over the economic outlook. The downbeat data fueled worries the Federal Reserve’s aggressive tightening campaign could trigger recession.

Across the Atlantic, traders expect around 125 basis points of additional ECB rate hikes through early 2023. However, Europe’s precarious energy situation may limit how fast policy can be normalized.

Chinese Factories Expand Unexpectedly in August

During Wednesday’s Asia trading session, markets initially slipped but rebounded to close higher. Data showing China’s factory activity unexpectedly returned to growth last month helped improve sentiment.

The official manufacturing Purchasing Managers’ Index rose to 50.1 in August after three straight months of contraction below 50. The non-manufacturing gauge also indicated continuing service sector expansion.

But analysts cautioned the apparent rebound may prove temporary given still weak domestic demand in China. The country’s fragile recovery remains hostage to strict zero-Covid restrictions as outbreaks prompt abrupt lockdowns.

Nonetheless, the Hang Seng in Hong Kong gained 0.8% and the Shanghai Composite added 0.45%. Japan’s Nikkei 225 finished up 0.5%.

Gloomy German Consumer Morale Set to Worsen Further

In the latest sign of crumbling sentiment among European consumers, German market research group GfK predicted the country’s consumer confidence reading will slide to -26.5 in October.

That’s a downward revision from the initial forecast of -26.0 and another reminder that anxious shoppers are tightening their belts in response to sky-high inflation and energy costs.

GfK cautioned confidence is unlikely to rebound significantly next year. The increasingly dim outlook follows dismal PMI figures earlier this week showing private sector activity in Europe’s largest economy contracted sharply in September.

Dutch Insurers Plunge on Adverse Court Ruling

Shares of Dutch insurers NN Group and ASR Nederland plunged as much as 13% on Wednesday after an interim court ruling said the firms failed to adequately disclose costs associated with legacy investment products.

The court stated NN Group, ASR and peers did not provide sufficient information on fees linked to certain insurance policies sold between 1990 and 2005. While NN plans to appeal, it warned the case could have “substantial financial consequences.”

ING analyst Albert Ploegh called the vague ruling “an unwelcome surprise.” Nonetheless, NN Group reiterated its plan to pay out €1.5 billion in dividends this year. The news sent insurance stocks tumbling across Europe.

H&M Beats Profit Estimates Despite Slow September

Swedish fast fashion retailer H&M bucked the negative sentiment, with its shares jumping 4% after reporting better-than-expected quarterly earnings.

H&M posted operating profit of 4.74 billion crowns for June-August, exceeding the 4.72 billion forecast. However, the company noted unusually warm weather weighed on sales in September.

Looking ahead, H&M announced it will debut its first store in Brazil next year as it continues expanding globally. The company also plans to gradually reopen locations in Ukraine starting in November.

Fed Rate Hike Bets Firm Ahead of Monthly Jobs Data

Across the Atlantic, Treasury yields climbed and the dollar held near 20-year highs on Wednesday amid renewed speculation of more supersized Fed rate increases. Friday’s U.S. payrolls report could strengthen the case for rates topping 4%.

Markets expect at least 125 basis points of additional ECB tightening through early 2023. However, with Europe’s economy faltering, the central bank may need to tighten policy at a more gradual pace than the Fed.

As the third quarter wraps up, volatility looks poised to continue as central banks combat stubborn inflation while trying to avoid recession. Any solid signs of easing price pressures could spark a relief rally.

Analysis: Diverging Views on Economic Trajectory

The mix of recent data highlights divergence in the global growth narrative. While U.S. job gains and consumer spending remain surprisingly resilient, Europe appears headed for recession as the energy crisis bites.

China’s outlook also remains murky due to uncertainties over Covid curbs and the property sector downturn. Meanwhile, supply chain snarls show few signs of abating.

For central bankers, the situation underscores the precarious balance between taming inflation and avoiding an economic slump. The path ahead promises more market turbulence as policy navigates uncharted territory.

Aggressive Fed tightening boosted the dollar, which nears 20-year highs against currency peers. Though a stronger greenback could dampen U.S. inflation, it weighs on Asian and European exports.

With volatility elevated, traders recommend holding a diversified mix of assets including gold and other traditional hedges. Fixed income remains attractive amid eventual rate policy easing.

Citi: Major Central Banks Near End of Hiking Campaigns

Analysts at Citi believe the Fed and ECB are close to completing their rate hike cycles, citing contrasting U.S. economic resilience and a weaker European trajectory.

“Rate hiking cycles are coming to a quick end,” strategist Dirk Willer said in a Thursday note. However, the Fed may need to continue tightening given surprisingly strong U.S. growth, while Europe inflation remains stubborn.

Willer remains bullish on Latin American stocks, dubbed “cheap cyclicals”, while advising clients to short British equities given currency vulnerability. The UK economy looks set to enter recession sooner than its neighbors.

The Road Ahead: Brace for More Volatility

With the third quarter winding down, markets remain on edge over economic uncertainty, corporate profit fears and monetary policy. While risks stay tilted to the downside, cooling inflation could spark gains.

“Patience is prudent,” said San Francisco Fed President Mary Daly. More data is needed to determine if additional tightening is required, or a pause is appropriate.

Nonetheless, traders warn significant stock swings could persist into year-end and 2023 before visibility improves. Maintaining defensive positions in the near-term may help weather upcoming storms.