European stocks slump after sharp selloff in US shares

Concerns rise over economic slowdown

European stocks slumped on Thursday as a sharp selloff in US shares fuelled concerns of an economic slowdown and further dented demand for risk assets.

Dublin’s Iseq dropped 2.27 per cent as markets opened while the Stoxx Europe 600 Index was down 1.7 per cent as of 9.03am in London after the S&P 500 posted its biggest drop in almost two years. Personal care stocks were the biggest decliners, followed by autos and financial services.

Europe’s equity benchmark attempted to recover last week after a four-week slump as investors were lured by cheaper valuations, but the rebound proved short-lived after earnings reports from major US retailers raised worries about the hit to corporate margins from stubbornly high inflation.

Vulnerable shares

Tech and growth shares have been particularly vulnerable in the latest selloff amid risks to their future earnings from rising rates.

“I still think we have classic bear market action with volatility in charge and, for equities, the simple conclusion is that corporate margins will be under pressure from here,” said Neil Campling, head of TMT research at Mirabaud Securities.

Strategists broadly expect stocks globally to plumb new lows despite the $11 trillion rout in the MSCI All Country World Index since late-March, although they have said fears of an imminent recession are overblown. Goldman Sachs Group’s David Kostin became the latest to say stock investors were pricing greater odds of a recession compared with the recent strength in macroeconomic indicators.

“A red wall of worry has built up across financial markets with investors increasingly nervous that economies are set to career into recession,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “Consumers are showing more caution but after the lockdowns, there is clearly pent up demand for travel. So while goods price inflation may fall, it may be hard to keep a lid on the price of services.”

In Europe, the Stoxx 600 will end December at 476 index points, down 2.5 per cent for the year, according to the average of 15 forecasts in Bloomberg’s monthly survey. While that implies about 8 per cent upside from Tuesday’s close, strategists have lowered their estimates by 5 index points in the past month.

Among individual movers, HomeServe shares jumped as much as 12 per cent after Brookfield Asset Managament agreed to buy the home emergency and repair services company for £4.1 billion (€4.8 billion). Nestle, on the other hand, slumped after Sanford C. Bernstein analysts downgraded the stock, saying the shares will “struggle” if market sentiment improves and investors exit havens. – Bloomberg

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