Europe close: Banking stocks lead markets lower ahead of Fed decision

(Sharecast News) - European stocks fell sharply on Tuesday as investors weighed the latest economic data and scaled back risk appetite ahead of an expected interest-rate cut from the Federal Reserve.

The pan-European Stoxx 600 index was 1.1% lower at 550.79, pulling back after hitting a three-week high of 557.16 on Monday.

Markets across the continent registered steep losses, with Frankfurt's DAX (-1.8%), Madrid's IBEX (-1.5%) and Milan's FTSE MIB (-1.3%) leading the declines. Losses in London, however, were less pronounced (-0.8%) as rising gold prices propped up the FTSE 100's heavyweight mining sector.

Wall Street stocks started higher but fell quickly into the red, with the S&P 500 and Nasdaq pulling back from record highs, as traders assessed US President Donald Trump's claim that tariff talks with China had made progress.

Investors were also sitting on their hands ahead of the Fed's all-important policy decision scheduled for Wednesday evening, though an interest-rate cut has already been largely priced in.

"Central bankers at the Fed have come under significant pressure from the White House to deliver a cut despite ongoing concerns about how tariffs will wash through the US economy, with inflation already smouldering ominously," said AJ Bell's head of financial analysis Danni Hewson.

In economic data, eurozone industrial production rose by just 0.3% in July following a revised 0.6% drop in June, missing the consensus forecast for a gain of 0.4%. According to Eurostat, industrial production increased across most categories month-on-month, but a 2.9% fall in energy production weighed heavily on overall growth.

In the UK, the unemployment rate was unchanged at 4.7% in July, official data showed, in line with expectations, while wage growth cooled.

In other news, gold prices hovered near $3,700 on Tuesday, on a weaker dollar and mounting expectations the Federal Reserve will cut interest rates this week. By the close of play in Europe, gold was $3,6987.60 per troy ounce, another fresh high. The precious metal, which was trading at $2,600 in early January, has now put on more than 40% over the year.

Banks provide a drag

Banking stocks were among the day's biggest losers, with heavyweights Commerzbank, Societe Generale and Deutsche Bank among the top ten fallers on the Stoxx 600.

Even BNP Paribas fell after the French lender reconfirmed its financial targets for 2025 and pointed to a further improvement in its return on tangible equity and capital ratio measures over the medium term.

London's miners were bucking the trend, with Fresnillo and Glencore among the Footsie's best performers as the gold prices continued to rise.

Shares in recruitment companies were lower after SThree lowered profit forecasts to well below expectations, sparking a slump in the stock prices of rivals Hays, Randstad and Adecco.