The pan-European Stoxx 600 fell 1.6% at the close, with retail shares losing 2% as almost all sectors and major stocks ended in negative territory. Oil and gas shares rose 0.7%.
The Dow Jones Industrial Average plunged more than 1,000 points and the Nasdaq Composite fell nearly 5% on Thursday, erasing Wednesday’s rally. Initial relief over the Fed’s decision to scrap more aggressive hikes apparently gave way once again to fears that a sharp cycle of hikes to rein in red-hot inflation could hurt economic growth.
US stocks lost more ground on Friday morning. Meanwhile, the dollar continues to strengthen amid economic anxiety, with the dollar index hitting a new 20-year high on Friday morning.
Russ Mould, chief investment officer at AJ Bell, said market sentiment had changed once traders had time to analyze the Fed’s guidance and assess the outlook more fully.
“Inflation concerns are to blame, as always, and the sharp swings we’ve seen this week are a reminder that sentiment is as fragile as a porcelain doll,” he said.
“The other fear is that the cure for inflation, higher rates, could be as bad as the disease if they stifle growth and even cause a recession.”
Monetary policy remains a key dictator of market sentiment. Global bond yields have risen in recent weeks as investors react to interest rate hikes by the Federal Reserve and the Bank of England. The European Central Bank has yet to do the same, but it looks like momentum is building for a summer hike.
ECB member and Bank of Finland Governor Olli Rehn told CNBC on Friday that the market turmoil can be attributed to “widespread uncertainty” casting a shadow over the economic outlook.
“In Europe, we are faced with this especially because of the close proximity and especially because of the excessive energy dependence on Russian fossil fuels,” he said.
“As for the European economy, we have already lowered our growth forecasts due to these factors. On the other hand, the European economy is still growing, the recovery is underway, employment is improving and we are seeing that there is a lot of fiscal and monetary accommodation that is still supporting the economy.”
Rehn called for a 25 basis point rate hike at the ECB’s next policy meeting to prevent inflation expectations from becoming “entrenched”.
Earnings continue to weigh on individual share price movement in Europe, with Adidas and British Airways parent IAG among those reporting before the bell on Friday.
Shares in pharmaceutical ingredients business EUROAPI rose more than 8% on the Paris stock market debut of the Sanofi spin-off.
Spanish drugmaker Grifols also added more than 9% after posting an improved EBITDA margin in the first quarter.
At the bottom of the blue-chip European index, Danish hospital equipment maker Ambu fell more than 11% after cutting its guidance.
Investors are also monitoring Russia’s progress in eastern and southern Ukraine as its forces appear to have stepped up attacks in the regions.
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