On Tuesday, European shares fell to new six-month lows, pulled down by rate-sensitive utilities and miners, as forecasts that US interest rates will remain high for a long time boosted Treasury yields and the currency.
Recent good economic statistics, as well as the passing of a U.S. funding package to avoid a federal government shutdown, pushed the dollar to 11-month highs and the 10-year Treasury yield to a new 16-year high.
The pan-European STOXX 600 index (.STOXX) plummeted 1.1%, reaching its lowest level since March 24, while Wall Street’s major indices sank as well.
“The steep drop we’ve seen since midday is largely due to US futures,” said Steve Sosnick, chief strategist at Interactive Brokers.
“They took a steep leg lower when US bond traders came in and started the sell-off, and then spilled over to European equities,” Sosnick stated.
Leading sectoral drops, the utilities index (.SX6P) fell 2.7% to an 11-month low, weighed down by the potential of increased interest rates.
Orsted (ORSTED.CO) shares slumped 6.0% to a more than five-year low, while Vestas Wind Systems (VWS.CO) fell 5.5%.
“Higher interest rates and commodity prices have drastically altered the assumptions behind offshore wind power… many projects in the global pipeline were negotiated on assumptions of permanently low interest rates and cheap industrial metals,” stated Peter Garnry, head of equity strategy at Saxo Bank of America.
Miners (.SXPP) slumped 2.6% as copper prices plummeted to a four-month low against a strong dollar.
Deutsche Bank reduced its eurozone economic growth prediction for 2023 to 0.4%, warning that a mild recession in the region in the second half of the year cannot be “ruled out.”
All European subindices fell, with economy-sensitive bank stocks (.SX7P) falling 0.9%.
Officials from the United States Federal Reserve, including Governor Michelle Bowman and Fed Vice Chair for Supervision Michael Barr, stated on Monday that monetary policy will need to remain restrictive for “some time” in order to get inflation down to the Fed’s 2% target.
Shares of German online fashion retailer Zalando (ZALG.DE) fell 5.3% after Deutsche Bank slashed its prediction for adjusted earnings before interest and taxes, while shares of British luxury brand Burberry (BRBY.L) fell 3.6% after a downgrade from UBS.
Boohoo (BOOH.L) fell 2.8% after the British online clothes retailer warned that a slower-than-expected rebound in sales volumes may result in little or no top-line growth for the full year.
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