(Bloomberg) -- European stocks fell on Wednesday as stagflation fears hit sentiment, after reports indicated that the region’s economy was further sinking into a downturn while inflation was set to stay persistently high. 

The pan-European Stoxx 600 Index fell 0.3% by the close in London, with retail and industrial-goods sectors trading lower. Concerns were underlined by the European Central Bank’s new economic estimates, which will show an inflation forecast for 2024 above 3% — strengthening the case for further tightening. 

That’s as Germany was set to predict an economic contraction for this year instead of growth, while data also showed the UK economy shrank at the fastest pace in seven months in July as strikes and wet weather hit activity, reviving recession fears. 

Auto stocks gave up earlier gains after the European Union said it was launching an investigation into Chinese subsidies for electric vehicles, amid concerns of possible retaliation from China. 

“It is definitely a sign of increased political tensions and increased competition”, said Evgenia Molotova, senior investment manager at Pictet Asset Management. “China is a very important market for European auto manufacturers”, such as Volkswagen, she added, noting the risk of tit-for-tat measures from the Chinese government. 

Among other individual stocks, BP Plc shares fell after its Chief Executive Officer Bernard Looney resigned over a failure to fully disclose past relationships with colleagues. Novo Nordisk A/S shares declined to reverse initial gains, after Europe’s most valuable company implemented a 2-for-1 split. 

Banking stocks outperformed as money markets boosted ECB policy tightening wagers, pricing a quarter-point increase by year-end. 

As pressure builds for Europe’s central bank to hike interest rates at its meeting on Thursday, investors can expect that further monetary tightening will dim the immediate prospects of the European economy.

“The narrative that is frightening is stagflation,” said Mabrouk Chetouane, head of global market strategy at Natixis Global Asset Management. 

SECTORS TO WATCH

  • European oil and gas stocks may be active on Wednesday after oil rallied to a 10-month high as production cuts by leaders of the OPEC+ cartel strain global supplies.
  • European banks, insurers and real estate stocks may be active on Wednesday after Reuters reported that the ECB expects euro zone inflation to remain above 3% into 2024, putting pressure on the central bank’s policy makers to hike interest rates at their meeting on Thursday.

For more on equity markets:

  • Novo’s Split Aims for Big Tech-Like Retail Buzz: Taking Stock
  • M&A Watch Europe: Barclays Sees M&A and ECM Rebound
  • Frankfurt Is Looking to Close Gap With Zurich, Milan: ECM Watch
  • US Stock Futures Unchanged; Innovage Falls
  • Aviva Trims Portfolio With SingLife Exit: The London Rush

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--With assistance from Joel Leon.

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