EUROPE MARKETS: European Stocks Weak As Investors Wait For ECB Meeting

By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stock markets moved lower on Tuesday after lackluster euro-zone inflation data strengthened the case for the European Central Bank to bring in new easing measures. Analysts noted, however, that the prospect of looser monetary policy has largely been priced into the market.

The Stoxx Europe 600 index fell 0.5% to close at 343.48 after posting a 0.2% advance on Monday.

Among notable decliners, shares of Davide Campari-Milano SpA dropped 1.8% after Goldman Sachs cut the drinks maker to sell from neutral.

Tesco PLC (TSCDF) dropped 1% after market researcher Kantar said the U.K. retailer lost market share in the 12 weeks to May 25.

On a more upbeat note, shares of Wolseley PLC climbed 1.6% after the distributor of heating and plumbing products reported strong growth in the U.S. and the Nordics during the third quarter.

'Abysmal' euro-zone inflation data

More broadly, euro-zone inflation data for May were the main event in Europe. The consumer-price index rose 0.5% last month, down from 0.7% in April and falling short of analysts expectations. Peter Dixon, strategist at Commerzbank in London, said the weak inflation reading reinforced the view that the ECB will cut interest rates at its meeting on Thursday and may even dump the deposit rate into the negative for the first time.

"Basically, markets had already factored this in," Dixon said. "We are two days from the meeting, so it doesn't make much sense to take a position at this stage."

Many economists also expect the ECB to launch a package of liquidity measures, possibly including a new round of long-term refinancing operations. That could boost bank lending and so spur growth and combat weak inflation levels.

With inflation now at 0.5%, growth in consumer prices has fallen back to the four-year low it also touched in March. James Ashley, chief European economist at RBC Capital Markets, called the May data "abysmal," noting the March weakness was largely due to distortions caused by the timing of Easter.

"This time, in our view, the 0.5% reading is a 'clean' reflection of the dearth of inflationary pressures," Ashley said in a note.

Eurostat released euro-zone unemployment data for April on Tuesday, showing the joblessness level in the currency union fell to 11.7% from 11.8% in March. Consensus was for a 11.8% reading.

Most European equity benchmarks closed in the red, with Germany's DAX 30 index down 0.3% to 9,919.74 and France's CAC 40 index giving up 0.3% to 4,503.69. The U.K.'s FTSE 100 index lost 0.4% to 6,836.30.

U.S. stocks also traded lower, with the S&P 500 index (SPX) and the Dow Jones Industrial Average (DJI) struggling to build on three straight days of gains.

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