European shares on Friday chalked up their worst week in two months, with tech stocks and retailers feeling the brunt of selling on the prospect of bigger interest rate hikes to tame decades-high inflation.
The pan-European STOXX 600 index fell 1.91 percent to 429.91, declining 4.55 percent from a week earlier, with retailers down 2 percent and technology stocks losing 2.4 percent.
The retail index hit its lowest in two years after a string of weak earnings reports that highlighted the fallout from surging inflation, the war in Ukraine and a fresh round of lockdowns in China.
Adidas dropped 3.6 percent as it lowered expectations for sales this year, with renewed COVID-19 lockdowns in China hitting the German sportswear company.
Tech shares took cues from declines in growth stocks on Wall Street, which were dragged down by elevated US Treasury yields.
Data showed stronger-than-expected US jobs growth, exacerbating fears of bigger interest rate hikes by the US Federal Reserve.
The European Central Bank (ECB) is expected to raise interest rates later this year, with some analysts predicting a hike as early as July after recent record eurozone inflation readings.
“We agree with investors that the ECB is likely to raise interest rates by 25bp [basis points] in July,” said Jack Allen-Reynolds, senior Europe economist at Capital Economics.
The worst is yet to come for the eurozone economy, he said, adding: “Shortages are likely to continue weighing on activity and higher inflation will eat further into real incomes.”
Oil & gas stocks were among the few gainers in Europe, up 0.5 percent as crude prices traded above US$110 a barrel ahead of an impending EU embargo on Russian oil.
Meanwhile, the Bank of England (BOE) on Thursday said that the UK risked the double-whammy of a recession and inflation above 10 percent as it raised interest rates to their highest since 2009, which weighed on British stocks.
“The gloomy economic outlook will likely limit the BoE’s ability to tighten policy aggressively,” BCA Research analysts said in a note.
The blue-chip FTSE 100 closed down 1.54 percent at 7,387.94, posting a weekly decline of 2.08 percent.
However, the index has outperformed major stock markets so far this year as a surge in oil and metal prices, as well as weakness in sterling, boosted commodity giants and exporters.
“The FTSE 100 is exposed to all the sectors that are causing inflation concerns, and that benefits the UK equity market,” said Caroline Simmons, UK chief investment officer at UBS Global Wealth Management, who expects the index to hit 8,100 by the end of the year.
“It hurts the economy because of the consumer squeeze, but it benefits the FTSE 100. Now, of course, sterling has weakened and that’s also helpful,” she said.
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