European shares slip on fears over rising China COVID cases, await rate decisions

By Amruta Khandekar and Bansari Mayur Kamdar

(Reuters) - European shares slipped on Monday as investors braced for U.S. and European central bank interest rate decisions, while rising COVID-19 infections in China also weighed on sentiment.

The STOXX 600 index closed down 0.5%.

Last week, the index posted its first weekly drop in eight as fears of an impending global recession due to aggressive rate hikes from major central banks countered optimism around the loosening of strict COVID-19 curbs in China.

The coming days will be a major test for markets that have been pinning their hopes on central banks scaling back the pace and size of rate hikes, although the strength in U.S. economic data last week cooled some of those expectations.

With recent signs of easing inflationary pressures in the euro zone, the European Central Bank is expected to deliver a dialled-down 50 basis points (bps) rate hike on Dec. 15, a day after the U.S. Federal Reserve's interest rate announcement.

"The markets are still relying on this narrative that inflation will cool, the central banks will be able to slow down, pause interest rate increases," said Russ Mould, investment director at AJ Bell.

"But the numbers remain mixed, so it's perhaps not quite as clear cut as the markets would like it to be."

The pan-European STOXX 600 has fallen nearly 10.4% so far this year as the ECB embarked on tightening monetary policy, alongside global peers in an effort to tame inflation.

"Underlying inflation is unlikely to clearly peak until later in the year (2023)," Deutsche Bank economists said.

"The risks to inflation are to the upside and the market and consensus views on inflation remain too benign," they added.

With surging COVID-19 cases spurring concerns about a disruption to Chinese economic activity, industrials and some China-exposed luxury firms such as LVMH weighed on the STOXX 600.

Miners dropped 1.7% as copper prices slipped on economic worries in top consumer China and the U.S. interest rate hike uncertainty. [MET/L]

China-exposed insurance company Prudential slid 2.7%, leading Europe's financial sector lower.

Meanwhile, Danish food ingredients and enzymes makers Novozymes and Chr. Hansen said they have agreed to merge. Chr. Hansen shares rose 17.6%, while Novozymes dropped 15.2% after the joint announcement.

London Stock Exchange Group shares rose 3.0% after Microsoft agreed to buy a stake of about 4% as part of a broader deal to migrate the bourse's data to the cloud.

Sanofi slipped after the French drugmaker on Sunday said it pulled out of talks to buy Horizon Therapeutics.

(Reporting by Amruta Khandekar and Bansari Mayur Kamdar; Editing by Rashmi Aich, Savio D'Souza and Alexander Smith)