European Stocks Fall as Tech Shares Hit by Surge in Bond Yields

(Bloomberg) -- European stocks dropped the most in nearly a month as a renewed surge in bond yields hit investor sentiment, with technology shares among the biggest laggards.

The Stoxx Europe 600 Index closed 1.5% lower in its biggest decline since March 10. Travel and leisure and consumer stocks joined tech in posting the biggest daily retreat.

READ: Markets Bet on Sharpest Fed Tightening in Almost Three Decades

Comments on Tuesday by the U.S. Federal Reserve Governor Lael Brainard suggesting the central bank could trim its balance sheet faster than expected have rekindled fears of an economic downturn, fueling the selloff in the bond market. Philadelphia Federal Reserve Bank President Patrick Harkersaid also said on Wednesday inflation was “far too high” and steady interest-rate increases and balance sheet reduction should help reduce price pressures over the next few years.

The U.S. Nasdaq 100 sank 2.4% today, bringing total declines in just two days to more than 4.5%. Tech stocks come under particular pressure from higher interest rates as they mean a bigger discount for the present value of future profits for the so-called growth sectors.

European equities had managed to eke out gains in the past three sessions as traders were attracted by lower valuations, but concerns linger around surging inflation and worries of the faster-than-expected pace of monetary tightening by the Fed.

“The market is now pricing in even more rate rate hikes and, with it, an even higher probability that the Fed is overreacting and will trigger a recession in 2023,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “We think the Fed is clearly making a policy mistake by being too hawkish, but it is too early to become outright bearish on equity markets.”

Focus today will be on minutes from the Fed's March policy meeting, due later on Wednesday, which are expected to unveil details of likely plans to shrink its massive balance sheet as policy makers confront the highest inflation in four decades.

READ: Deutsche Bank Strategists See U.S. Earnings Holding Firm in 1Q

With the war in Ukraine sending commodity prices surging in the first quarter, investors are also growing concerned about the hit from inflation to corporate profit margins heading into the earnings season. Sanford C. Bernstein strategists including Sarah McCarthy warned the consensus outlook for European companies' margins this year was too bullish amid the economic slowdown and higher input costs.

For Patrick Moonen, principal multi-asset strategist at NN Investment Partners, the geopolitical risks and their impact on commodity prices means the the risk/return trade-off is deteriorating. “This threatens the purchasing power of consumers and may start to weigh on corporate confidence and margins.

In Europe, the French elections and the narrowing lead of Macron in the polls add another layer of uncertainty,” he said. The CAC 40 underperformed other benchmarks again today, falling 2.2%.

READ: Traders Wake Up to Le Pen Risk as French Election Polls Tighten

European luxury stocks were among the region's worst performers on Wednesday, with Kering SA and LVMH retreating, after hawkish comments from the Fed rekindled fears of an economic downturn, leading to a selloff in pricey stocks.

Among individual movers, Imperial Brands Plc gained after forecasting a slight increase in profit this year, while shares of Chr. Hansen Holding A/S jumped as the nutritional ingredients manufacturer reported better-than-expected second-quarter earnings and raised its full-year growth forecast.

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