European stocks drop amid uncertainty over rate cuts

The pan-European STOXX 600 index closed 0.2% lower, after reaching a one-week low earlier in the session, with banks and luxury stocks leading sectoral losses, down nearly 0.9% each

European stocks closed marginally lower on Tuesday, their third out of four sessions in the red, as caution around interest rate cuts dominated, with investors waiting for economic data due later in the week.

The pan-European STOXX 600 index closed 0.2% lower, after reaching a one-week low earlier in the session, with banks and luxury stocks leading sectoral losses, down nearly 0.9% each.

The lender-heavy Italian share index lagged regional peers, declining 0.6% to reach a more than one-week low.

The STOXX index has dropped from record highs since ECB policymakers cautioned against expecting successive interest rate cuts in June and July.

Traders expect cuts worth 66 bps from the European Central Bank by year-end, as per the LSEG rate probabilities app, with the first seen in June.

Eurozone negotiated wage data for the first quarter along with May manufacturing data expected on Thursday could shed light on the state of the economy and offer clues to the trajectory of interest rates.

Eurozone productivity is weak, so the bulk of the rise in labour costs over the first quarter most likely reflects higher employee compensation. Elevated eurozone wage pressures suggest the easing cycle will be shallow, according to Win Thin, global head of markets strategy at Brown Brothers Harriman.

Investors will also focus on minutes from the Fed's last policy meeting and chip giant Nvidia's earnings on Wednesday to see if the recent momentum that pushed U.S. and European equities to record peaks continues.

On Tuesday, data showed German producer prices dropped more than expected in April, mainly due to lower energy prices.

Drugmaker AstraZeneca advanced 2.2%, among top gainers on the UK's main FTSE 100 index, after saying it aimed to increase revenue by around 75% to $80 billion by 2030.