European stocks plunge as traders fret over hawkish political outlook

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(Bloomberg) – European stocks fell on Thursday after a failed rally attempt as signs of aggressive policy tightening by the U.S. Federal Reserve weighed on investor sentiment.

The Stoxx Europe 600 index closed down 0.2% after gaining up to 1% earlier. Health and personal care stocks outperformed, while energy stocks fell along with oil. Tech stocks were again under pressure, falling for the third day as Treasury yields resumed their ascent.

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Demand for risky assets globally has fallen this week, with tech stocks bearing the brunt of the sell-off amid fears the Fed’s plan to shrink its balance sheet while raising interest rates to counter the inflation will tip the economy into a recession. St. Louis Federal Reserve Chairman James Bullard said Thursday that the central bank may need to raise rates to around 3.5% to counter inflation that is far too high.

In Europe, investors are also worried about the impact on economic growth and corporate profits from the war in Ukraine and soaring commodity prices. The Stoxx 600 fell 1.5% on Wednesday, the most in nearly a month.

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Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, said that while regional equity upside is limited, “still bearish positioning and sentiment as well as strong seasonality in April are supportive. Against this backdrop, I expect more of a range-related market in the near future.”

READ: Morgan Stanley strategists say risks are rising for European stocks

Meanwhile, Morgan Stanley strategists said the European market was not currently pricing in the risk of a contraction in gross domestic product despite a “much higher probability of a European recession than usual.” Low equity valuations reflect risks to earnings estimates, which should be reduced in the coming months, they said, viewing the risk-reward outlook for European equities as more challenging.

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Monica Defend, director of the Amundi Institute, also said European equities were less attractive than their US counterparts due to the region’s energy dependence on Russia and its geographical proximity to the war. “Obviously there could be a nice selection of titles in Europe, but if you ask me in general, we’ve changed our preference,” she said in an interview with Bloomberg TV.

Among individual movers, Shell Plc fell after saying its exit from Russia would result in writedowns of $4 billion to $5 billion and that extreme volatility in energy prices in the first quarter could affect cash flow. Atlantia SpA, on the other hand, hit its highest level in more than two years following a Bloomberg report that the highway and airport company could become the target of a bidding war.

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