European stocks tumbled for the sixth day in the longest losing streak since the early pandemic days of March 2020 as investors were worried about aggressive central-bank policy tightening amid stubbornly high inflation.
The Stoxx Europe 600 Index closed 1.3% lower, sinking to the lowest since February 2021. Media and construction sectors led declines, while banks and energy outperformed.
“We remain bearish on the equity outlook,” said Marija Veitmane, senior strategist at State Street Global Markets. “Inflation is still a huge problem and central banks need to be very aggressive to fight it.” With consumer wealth and corporate cash piles both remaining high, central banks will be more determined to hike rates aggressively, worsening the outlook for stocks, she added.
After the European Central Bank last week outlined a slightly more aggressive path than economists had foreseen, focus this week is on the Federal Reserve’s policy meeting. Bets are climbing that the U.S. central bank is considering its biggest interest-rate increase since 1994.
“Just two days ago I didn’t imagine for a second that we would be seriously talking about a 75 basis-points hike at this week’s Fed meeting, but in one session the market has got there and with the Fed in blackout they cannot push back even if they want to,” said James Athey, investment director at abrdn. “Their quandary is that if they don’t do 75 basis-points tomorrow, they risk providing a dovish shock and making their job more difficult in the future.”
Investors believe hawkish central banks are now the biggest risk for European stocks, followed by global recession and inflation, according to Bank of America Corp.’s June fund manager survey for the region, in which respondents’ global growth expectations dropped to all-time lows.
The European equities benchmark has already been hammered this year as worries of hawkish central banks and a potential recession dent demand for risk assets, despite stock valuations falling well below their long-term averages. The gauge fell into so-called oversold territory on Tuesday with 14-day relative strength index of the Stoxx 600 dropping to 29. A dip below 30 is seen by some market participants as a sign that the selloff has gone too far and the security is poised for a rebound.
“We would gradually start to get back into equities,” said Nannette Hechler-Fayd’herbe, chief investment officer of international wealth management and global head economics and research at Credit Suisse Group AG. “A sign to buy is the stabilization of long-term inflation expectations followed by bond yield stabilization eventually leading to a stabilization of the technology sector in equities.”
For Louise Dudley, global equities portfolio manager at Federated Hermes, relative havens include companies with “stable dividend policies, value in healthcare, energy and also some of the consumer-staples companies that are holding up given price elasticity for the strong brands, their ability to mitigate supply chain issues and strong current market conditions.”
Among individual movers, Atos SE sank 23%, the most on record, after the company announced the departure of newly arrived CEO Rodolphe Belmer and a separation into two publicly listed companies.