The pan-European Stoxx 600 fell 1.6% by the close, with retail stocks shedding 2% as almost all sectors and major bourses finished in negative territory. Oil and gas stocks gained 0.7%.
The Dow Jones Industrial Average plunged more than 1,000 points and the Nasdaq Composite fell nearly 5% on Thursday, erasing Wednesday’s rally. Initial relief over the Federal Reserve‘s ruling out of more aggressive hikes seemingly gave way once again to fears that a sharp hiking cycle in order to rein in red-hot inflation could harm economic growth.
Russ Mould, investment director at AJ Bell, said market sentiment had turned once traders had time to chew over the Fed guidance and assess the outlook more thoroughly.
“Concern about inflation is the culprit, as ever, and the wild swings we’ve seen this week are a reminder that sentiment is about as fragile as a porcelain doll,” he said.
“The other fear is that the cure for inflation, higher rates, could be as bad as the disease if they choke off growth and even lead to recession.”
Monetary policy remains a key dictator of market sentiment. Global bond yields have surged in recent weeks as investors react to interest rate hikes from the Fed and the Bank of England. The European Central Bank has yet to follow suit, but momentum appears to be building for a summer hike.
ECB member and Governor of the Bank of Finland Olli Rehn told CNBC on Friday that market turbulence can be attributed to the “pervasive uncertainty” that is overshadowing the economic outlook.
“In Europe, we are facing this especially because of the sheer proximity and especially because of the excessive energy dependency on Russian fossil fuels,” he said.
“As far as the European economy is concerned, we have already downgraded our growth forecasts because of these factors. On the other hand, the European economy is still growing, the recovery is on, employment is improving, and we are seeing that there is plenty of fiscal and monetary accommodation that is supporting the economy still.”
Rehn called for a 25-basis-point rate hike at the ECB’s next policy meeting in order to prevent inflation expectations becoming “entrenched.”
Shares of drug ingredients business EUROAPI climbed more than 8% on the Sanofi spin-off’s Paris stock market debut.
Spanish pharmaceutical company Grifols also added more than 9% after posting an improved first-quarter EBITDA margin.
At the bottom of the European blue chip index, Danish hospital equipment manufacturer Ambu slid more than 11% after cutting its guidance.
Investors are also monitoring Russia’s progress in eastern and southern Ukraine as its forces appear to have escalated assaults in the regions.
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