European stocks fell Friday, with data highlighting the European Central Bank’s troubles with low inflation levels, but the region’s equity benchmark was still on track for its best monthly performance in more than three years.
The euro EURUSD, -0.27% , meanwhile, fell against the dollar heading into the weekend following reports of a rough start in negotiations between Greece and its creditors.
Stocks on Friday declined after European Union data showed eurozone consumer prices were 0.6% lower than in January 2014, marking the largest decline in prices since July 2009. The tumble in energy prices was a significant factor driving the reading lower.
Stripping out energy and food prices, the core rate of inflation fell to 0.6% from 0.7% in December.
“Even if headline inflation does not fall further from here … there is now a clear and present risk that inflation expectations will become embedded at levels well below the ECB’s definition of price stability — and thus become progressively more difficult to be pushed back higher,” James Ashley, chief European economist at RBC Capital Markets, said in a note Friday.
There’s danger that the fall in energy prices could have second-round effects, such as companies in other sectors using lower costs to cut prices and gain market share and households deciding to hold off on nonessential spending as they wait for prices to fall, said Ben Brettell, senior economist at Hargreaves Lansdown, in a note. Such decisions may lead “to a deflationary spiral as we have seen in Japan.”
For the eurozone, Brettell said a descent into deflation is “particularly worrying” given the high levels of indebtedness in many members “as falling prices increase the real value of the debt, making these debts harder to service.”
Markets: The Stoxx Europe 600 SXXP, -0.46% closed down 0.5% at 367.05, with only the basic materials sector registering a gain. The pan-European index did end January up by 7.2%, the strongest month since October 2011, according to FactSet data. Much of that monthly surge came ahead of and after the ECB launched its massive debt-buying program aimed at boosting inflation and encouraging economic growth.
Friday’s decliners included BT Group PLC BT.A, -2.61% BT, -3.06% down 2.6% as investors assessed the British firm’s agreement to put 1.5 billion pounds ($2.26 billion) into its pension scheme before the end of April. It plans to pay £2 billion into the scheme over the next three years. BT also posted a rise in quarterly profit to £558 million and a decline in revenue.
Shares of Banca Monte dei Paschi di Siena BMPS, -7.83% sank 7.8%, sitting at the bottom of the Stoxx 600, following a Reuters report Thursday that the Italian bank may be under pressure by the European Central Bank to raise 3.5 billion euros ($3.95 billion) in capital. That amount would be 1 billion euros more than had been previously planned.
On the benchmarks, the U.K.’s FTSE 100 UKX, -0.90% fell 0.9% to 6,749.40, and France’s CAC 40 PX1, -0.59% shed 0.7% to 4,600.42. Germany’s DAX DAX, -0.41% fell 0.4% to 10,694.32. The DAX surged 9.1% this month, the best such rise since January 2012.
Friday’s top advancers included Seadrill Ltd. SDRL, +5.85% and Petrofac Ltd. PFC, +5.61% with the energy-sector companies rising 6% and 5.6%, respectively.
Greece and Russia: Greece’s Athex Composite GD, -1.59% turned lower, ending down 1.6% at 721.93. On Friday afternoon, the country’s finance minister Yanis Varoufakis told reporters the new government won’t cooperate with the troika of international lenders. Varoufakis, speaking alongside Jeroen Dijsselbloem, the head of eurozone finance ministers, said Greece won’t seek an extension of its bailout program when it ends in February, according to Reuters. But Dijsselbloem warned Greece against undoing terms of its bailout agreement.
The euro fell below $1.13 following the comments, trading at $1.1284 compared with $1.1321 on Thursday. The yield on 10-year Greek government bonds jumped back above 11 %. Greek drama continues: 5 key dates for Greece’s eurozone future
In Moscow, the Micex equity index XX:MCX rose 0.5% to 1,647.69, holding to gains after Russia’s central bank unexpectedly cut its key interest rate to 15% from 17%. That move came just a month after the rate was raised to 17% in a bid to stem the slide in the country’s currency.
The ruble USDRUB, +0.88% fell further against the dollar after Friday’s rate cut, leaving the greenback to buy 70.377. The dollar late Thursday fetched 68.902 rubles.
The drop in oil prices and sanctions from Western nations against Russia have “squeezed too much blood out” of Russia’s economy wrote Naeem Aslam, chief market analyst at AvaTrade. The 17% interest rate “was ridiculous and made no sense for consumers when the economy is consistently moving towards the verge of collapse.” The dollar could continue to gain against the Russian currency to 75 rubles, he added.
The Micex did finish January higher by 18%, its best monthly surge since a 22% climb in May 2009, according to FactSet.