European stocks fall on earnings jitters, rate hike worries

By Ankika Biswas and Amruta Khandekar

(Reuters) -European stocks slipped on Wednesday as lacklustre results from U.S. software giant Microsoft fanned fears about the outlook for the tech sector, while investors remained concerned that central banks were not yet close to pausing their interest rate hikes.

The pan-European STOXX 600 fell for a second day, closing down 0.3% but off a near two-week low hit earlier in the session.

Technology shares, which have rebounded this year after a rough 2022, fell 0.4% as Microsoft forecast current-quarter cloud business revenue below estimates.

"The weak outlook painted by Microsoft is weighing on the wider tech sector," said Michael Hewson, chief markets analyst at CMC Markets in London.

Energy and industrial firms were also big drags on the STOXX 600, falling 0.9% and 0.8% respectively.

Equities have rallied this year on hopes that the Federal Reserve and other major central banks were close to hitting the brakes on interest rate hikes as inflation eases.

However, such hopes have been doused in recent days by hawkish messages from European Central Bank (ECB) policymakers as well as an improvement in euro zone economic activity that has spurred speculation that the central bank might have more room to raise rates.

European Central Bank policymakers Joachim Nagel and Gabriel Makhlouf on Wednesday said they wouldn't be surprised if policymakers needed to keep increasing interest rates beyond March.

Economists at Deutsche Bank no longer expect a euro zone recession in 2023 and also lowered their inflation outlook, but don't see the ECB taking their foot off the hawkish pedal just yet.

German business morale brightened in January as Europe's largest economy started the new year with easing inflation and an improved outlook, the Ifo institute's survey showed.

Europe's earnings season kicks into gear next week. Earnings for STOXX 600 companies are expected to have increased 9.5% in the fourth quarter from a year earlier, down from 10.7% a week ago, according to Refinitiv data.

Corporate results from some European companies such as semiconductor firm ASML Holding NV on Wednesday offered some reasons for optimism about the region's corporate health.

Netcompany Group A/S tumbled 21.2% to the bottom of the STOXX 600 after the Danish IT services provider's EBITDA outlook missed analysts' expectations.

Shares of Lonza jumped 7.5% as the Swiss drug contract manufacturer said it will buy back shares worth 2 billion Swiss francs ($2.17 billion).

(Reporting by Ankika Biswas and Amruta Khandekar in Bengaluru; Editing by Subhranshu Sahu and Sherry Jacob-Phillips, Kirsten Donovan)