ECBThe ECB published its bi-annual Financial Stability Review on Wednesday, warning that financial markets risk a sudden and significant correction, with asset prices described as 'stretched by historical standards.' ECB Vice-President Luis de Guindos told CNBC that the risk of a market correction is 'elevated,' citing geopolitical turmoil, fiscal challenges, and outsized valuations. The Review flagged that downside risks from the Iran conflict, fiscal pressures, and macro-financial developments appear 'underestimated' by markets.
ECBThe ECB's Governing Council held all three key interest rates unchanged at its most recent meeting. The Review noted that upside risks to inflation and downside risks to growth have intensified simultaneously. Bank of France Governor Villeroy de Galhau told CNBC that the ECB 'will do what is necessary as an independent central bank to bring inflation back to 2% in the medium term,' reinforcing the Governing Council's inflation-first stance.
MACROThe European Commission cut its 2026 eurozone GDP growth forecast to 0.9%, down from 1.4% in 2025 and below its prior estimate of 1.2%, citing a 'major energy shock' and a 'volatile geopolitical and trade environment.' It simultaneously raised its 2026 eurozone inflation forecast to 3%, up sharply from its prior estimate of 1.9%, presenting policymakers with a stagflationary backdrop.
MACROEurozone producer price inflation hit 1.7% in April, its highest level since May 2023, driven by intermediate goods, mineral oil prices, and capital goods including machinery. The elevated PPI reading adds to the ECB's inflation concerns and increases the pass-through risk to consumer prices in the coming months.
ENERGYEuropean energy names were the hardest hit in Wednesday's session. TotalEnergies (TTE.PA) fell 3.58% and Eni (ENI.MI) dropped 2.81% in the Euro Stoxx 50, tracking the sharp decline in crude. Brent crude fell 5.31% to $94.29 and WTI dropped 5.55% to $88.68, while TTF gas eased 0.14% to €46.52/MWh and UK NBP gas fell 2.00% to 112.44p/therm. The Oil & Gas sector (EXH2.DE) was the second-worst European sector performer, down 0.70%.
MACROTurkish political risk re-emerged as a concern for European investors with emerging market exposure. A Turkish court annulled the main opposition party's 2023 congress, effectively ousting leader Ozgur Ozel in a ruling that rattled the lira and Turkish assets. The Turkish central bank intervened by selling billions of dollars in foreign reserves to stabilise markets. The ruling is seen as potentially prolonging President Erdogan's 23-year governance.