By Farah Elbahrawy
June 13, 2022
European equities slid to the lowest since early March as investors worried that surging inflation will fuel more aggressive monetary tightening, increasing risks of a recession.
The Stoxx 600 dropped 1.2% by 8:02 a.m. in London. S&P 500 futures dropped 1.8%, with the underlying index set to near a bear market. Yields on 10-year US Treasuries were at 3.19%, the highest in a month, and a selloff in European government bonds also gathered pace, with the yield on German’s two-year government debt rising above 1% for the first time in more than a decade.
European stocks have sold off this year amid worries central banks could cause economies to contract as they tighten policy to tame surging prices. The Stoxx Europe 600 fell to the lowest in a month last week, when the European Central Bank outlined a slightly more aggressive path than economists had foreseen and an unexpectedly hot reading in US consumer prices fueled bets the Federal Reserve will have to step up its battle against inflation.
““The problem for risk assets is that they’re in a conundrum, we’ve got the choice between two bad choices,” said Max Kettner, chief multi-asset strategist at HSBC. “Either inflation stays higher for longer, central banks need to do more, and that is detrimental to valuation, which is ultimately bad for for risk assets, on the other hand if growth falls by more than expected, then earnings estimates will have to come down. And the path to goldilocks looks incredibly difficult to achieve. From Friday, that path to a soft landing has become ever-more narrow”
Adding to political risks, French President Emmanuel Macron could lose his outright majority in parliament, forcing him to compromise and rely on coalition partners to push forward his ambitious reforms.
The UK economy shrank in April at the sharpest pace in more than a year as the government wound down Covid testing, raising the risk that the economy contracts in the second quarter.
“We’re in for a bumpy road from here. There are lots of rate hikes to come. There’s a lot of uncertainty around inflation,” said Isaac Poole, chief investment officer at Oreana Financial Services Ltd. Equity markets are pricing in a near 50% chance of a recession already and a further selloff would be confirming the economy is contracting, he said in an interview with Bloomberg Television.