By Sruthi Shankar and Amruta Khandekar
Jan 24 (Reuters) – European stocks fell on Tuesday as improving economic activity in the euro zone fueled speculation that the European Central Bank (ECB) may have more room to raise interest rates in order to to curb inflation.
* The pan-European STOXX 600 index lost 0.2%, but closed far from its session lows.
* Data showed that business activity in the euro zone made a surprise return to growth in January, adding to signs that the bloc’s slowdown may not be as deep as feared and that the monetary union could escape recession. .
* Hopes of a milder euro zone recession and smaller interest rate hikes from the Federal Reserve have boosted European equities this year. The STOXX 600 is up 6.7% so far in 2023, outpacing the 4.5% annual gain of the US benchmark S&P 500 index.
* Euro zone government bond yields fell after business activity data as investors tried to assess the ECB’s future path of monetary tightening.
* Although the ECB has raised rates at the fastest pace in its history, it has so far failed to bring inflation anywhere near its 2% target.
* Hardline comments from ECB policymakers have helped solidify bets for 50 basis point interest rate hikes at each of its next two meetings, one of which is scheduled for next week.
* The US economy also showed signs of improvement, with business activity slowing slightly in January, though it contracted for the seventh straight month.
* Among the STOXX 600 sectors, healthcare and energy stocks led declines, each falling more than 1%.
* Gains in the financial sector limited losses as banks rose 0.6% while economy-linked industrials also rose 0.9%.
(Reporting by Sruthi Shankar and Amruta Khandekar in Bengaluru; Editing in Spanish by Ricardo Figueroa)