What’s happening: European shares settled sharply lower on Friday, as investors digested hawkish comments from the US Federal Reserve.
What happened: A sharp decline in banking and energy shares put an end to the pan-European STOXX 600 index’s four-week winning streak.
European stocks tumbled from their near record-highs on profit taking. Concerns around the Fed looking to tighten its monetary policy sooner than planned also exerted pressure on global equities.
Why it matters: The benchmark European index recently surged to new highs as the ECB reiterated plans to keep its monetary policy loose. However, signals from the US Fed around an earlier-than-expected tapering exerted pressure on European equities.
US Fed official James Bullard said the central bank might look to increase interest rates by the end of next year, driven by higher inflation due to accelerating economic growth.
Investors were also worried as the EU lost its bid to expedite the delivery of AstraZeneca’s covid-19 vaccine. With the bloc now scrambling to shore up supplies, the latest court ruling is likely to slow the pace of vaccinations in the region. However, the judge supported the view that AstraZeneca had failed to honour its commitments and ordered the UK-based pharma giant to deliver vaccine doses by the agreed deadlines. In case the company misses supply deadlines, it will attract a penalty of €10 per dose, as per the European Commission.
Market sentiment was also hurt by the UK reporting a 1.4% decline in retail sales for May, which missed the consensus estimate of 1.6% growth. The data further revealed that food stores had contributed to the unexpected contraction in sales. As a result, London’s FTSE 100 tumbled 1.9% on Friday.
Germany’s PPI (producer price index) rose 1.5% in May, above market expectations of 0.7%. The DAX 30 index responded by shedding 1.8% of its value.
Commodity markets remained under pressure, with lower oil prices contributing to a 2.9% decline in energy shares in Europe. The STOXX 600 index slid 1.6% on Friday to record its worst session in five weeks. All sectors ended in the negative zone, with banking and oil shares being among the worst performers. The European index recorded a weekly decline of 1.2%.
“We’ve been very positive on financials and energy since last November and now we’re seeing a reversal of that as investors scale back. But this is temporary phase; there’s definitely more upside for financials and energy, which are still relatively cheap,” said TS Lombard analyst Andrea Cicione.
What to watch: With no economic data due for release from the Eurozone today, investors will look for further signs of policy tapering from the US Fed. Markets will also monitor ECB’s comments on its monetary policy.
The covid-19 pandemic remains one of the top concerns for markets, with total global infections surpassing 178.4 million.