European stocks drop as traders weigh Ukraine war and tighter monetary policy

European stocks dropped on Tuesday, following another day of sharp declines for Chinese equities, as investors weighed the potential economic implications of the war in Ukraine and the prospect of monetary policy tightening by the US Federal Reserve

Europe’s Stoxx 600 index fell 0.8 per cent in morning dealings, after rising 1.2 per cent in the prior session. Germany’s Dax lost 1.3 per cent and France’s Cac 40 index fell 1.4 per cent. In London, the FTSE 100 fell 0.8 per cent.

Sanctions

Tancredi Cordero, founder of investment group Kuros Associates, said that although sanctions imposed on Russia by western countries had already been "priced in" to a large extent, the market was waking up to the idea that the measures would mean higher than expected input costs, lower operating margins and lower earnings for many European companies.

Russia’s invasion of Ukraine late last month had left Europe “flirting on the edge of recession”, said Peter Oppenheimer, chief global equity strategist at Goldman Sachs, who added that the fighting would stoke inflation and curb growth.

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A net 69 per cent of respondents to a Bank of America survey of fund managers carried out in the week to March 10th expected the European economy to weaken over the coming year – the highest share since 2011.

Across the Atlantic, US futures tracking Wall Street’s S&P 500 index and the technology-heavy Nasdaq 100 added 0.1 per cent and 0.3 per cent respectively following declines in the previous session.

The moves came ahead of a two-day Fed meeting starting on Tuesday, after which the US central bank is expected to increase interest rates by 0.25 per centage points, raising borrowing costs for the first time since slashing them to zero at the start of the coronavirus pandemic as it attempts to curb inflation that was running at a 40-year high even before Russia invaded Ukraine.

In government debt markets, the yield on the 10-year US Treasury note fell 0.02 percentage points to 2.12 per cent on Tuesday, hovering around its highest level since 2019.

The yield on Germany’s 10-year Bund, which serves as a barometer for eurozone borrowing costs, fell 0.01 percentage point to 0.36 per cent, having hit its highest level in more than three years during the prior session.

Policy

Tighter monetary policy would hurt fixed income, stock prices, corporate earnings and valuations, said Mike Zigmont, head of trading and research at Harvest Volatility Management.

“Throw in a side dish of Russian war and one can understand why investors are lacking enthusiasm at the moment,” he said.

Equity markets in China and Hong Kong posted a second day of sharp declines, as investors grappled with a worsening Covid-19 outbreak in the mainland and reports that Beijing had signalled its willingness to provide Russia with military assistance to support its invasion of Ukraine.

Hong Kong’s benchmark Hang Seng index dropped 5.7 per cent, while the Hang Seng China Enterprises index of large and liquid Chinese stocks shed 6.6 per cent. In China, the CSI 300 index of Shanghai and Shenzhen listed stocks fell 4.6 per cent.

“The world’s second-biggest economy and largest crude oil importer is facing a tough challenge to contain a fresh wave of outbreak,” said Tamas Varga, analyst at PVM.

“Given the Chinese attitude of zero Covid, the recently declared growth target of 5.5 per cent might have to be revised lower again dealing a blow to the country’s oil demand growth that the IEA estimated to be 500,000 barrels per day in last month’s Oil Market Report”.

Oil prices continued to drop on Tuesday. Brent crude, the international benchmark, fell 7.7 per cent to $98.60 (€89.96) a barrel – slipping below $100 for the first time in more than a fortnight.

– Copyright The Financial Times Limited 2022