LONDON— European stocks closed sharply lower on Monday as investor sentiment was dominated by the prospect of upcoming interest rate hikes.
The pan-European Stoxx 600 ended down 2.4%, with travel and leisure stocks down around 5.3% to lead losses as all sectors and major stocks fell into negative territory.
The drop in sentiment in Europe on Monday came after the region’s major stock markets closed in negative territory last Friday.
Market sentiment had initially darkened last week by the European Central Bank’s confirmation on Thursday that it intends to raise interest rates by 25 basis points at its July meeting. A further increase is expected in September, the scale of which will be determined by the medium-term inflation outlook.
The central bank also significantly raised its inflation expectations for the euro zone and lowered its growth forecasts.
On Friday, US inflation data compounded losses with the much-anticipated May consumer price index report coming in more positive than expected, with US headline inflation hitting 8.6 % year-on-year, its highest level since December 1981.
The red-hot figure reignited market fears that the Federal Reserve will need to raise interest rates more aggressively to control inflation and risks tipping the economy into a recession.
US Treasury yields rose on 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 expected to opt for at least a 50 basis point hike, though the market is betting on a 75 basis point hike. Commodities have risen in light of Friday’s Data Clash.
Stocks in Asia tumbled on Monday as the region’s major markets posted heavy losses and the dollar-yen hovered around the 135 level. Meanwhile, US stocks fell on Monday as major averages came off its worst week since January.
“Looks like there’s room for it to drop even further from here, doesn’t it? We’ve gone in a couple of weeks from a market that was beginning to believe that these central banks could offer us a soft landing, I think of a market that he recognizes that, at best, he can land this on the proverbial Hudson,” Charlie Parker, managing director of 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 likely be a recession, so right now we are grabbing the side rails and holding out through the summer.”
The UK economy unexpectedly contracted 0.3% month-on-month in April, official data showed on Monday, raising fears of a slowdown ahead of the Bank of England’s latest monetary policy announcement on Thursday.
In terms of individual stock price movement in Europe, shares of Just Eat Takeaway tumbled more than 16% to the bottom of the blue-chip European index.