LONDON— European stocks closed sharply lower on Monday as investor sentiment was dominated by the prospect of forthcoming interest rate hikes.
The pan-European Stoxx 600 ended down 2.4%, with travel and leisure stocks dropping around 5.3% to lead losses as all sectors and major bourses slid into negative territory.
The slump in sentiment in Europe on Monday came after the region’s major bourses closed in negative territory last Friday.
Market mood had initially been darkened last week by the European Central Bank’s confirmation on Thursday that it intends to hike interest rates by 25 basis points at its July meeting. A further hike is expected in September, the scale of which will be determined by the medium-term inflation outlook.
The central bank also raised its inflation expectations for the euro zone significantly and downgraded its growth forecasts.
On Friday, U.S. inflation data compounded the losses with the highly anticipated May consumer price index report coming in hotter than expected, with U.S. headline inflation hitting 8.6% year on year, its highest since December 1981.
The red hot figure reignited market fears that the Federal Reserve will need to hike interest rates more aggressively to rein in inflation and risks tipping the economy into recession.
U.S. Treasury yields surged Monday morning, led by short-term rates, with the 2-year rate jumping to its highest level since 2007, and the 2-year/10-year yield curve inverting for the first time since April, a common indicator of an impending recession.
Fed officials will announce their next policy move on Wednesday following a meeting of the Federal Open Market Committee, and are widely expected to opt for a hike of at least 50 basis points, though market bets for a 75 basis point hike have risen in light of Friday’s data shock.
Shares in Asia plunged on Monday, as major markets in the region saw sharp losses and the dollar-yen hovered around the 135 level. Meanwhile, U.S. stocks tumbled on Monday as the major averages came off their worst week since January.
“It does feel like there’s room for it to fall further from here, doesn’t it? We’ve gone within a couple of weeks from a market that was just starting to believe that these central banks could deliver us a soft landing, I think to a market that recognizes that at best they can land this thing on the proverbial Hudson,” Charlie Parker, managing director at Albemarle Street Partners, told CNBC on Monday.
“In our view, there is still room here for some earnings downgrades as we head into what will be a likely recession, so we’re at the moment sort of gripping the siderails and holding on through the summer.”
The U.K. economy unexpectedly contracted by 0.3% month-on-month in April, official data showed on Monday, furthering fears of a slowdown ahead of the Bank of England’s latest monetary policy announcement on Thursday.
In terms of individual share price movement in Europe, Just Eat Takeaway shares plunged more than 16% to the bottom of the European blue chip index.