LONDON — European stocks closed lower on Friday as investors reacted to the European Central Bank’s latest policy decisions and a hotter-than-expected U.S. inflation print.
The pan-European Stoxx 600 ended the day down 2.7%, with banks shedding 4.9% to lead losses as all sectors and major bourses closed in negative territory.
The ECB on Thursday confirmed its intention to hike interest rates by 25 basis points at its July meeting, with a further hike expected in September, the scale of which will be determined by the medium-term inflation outlook.
The central bank also raised its inflation expectations for the euro zone significantly and downgraded its growth forecasts.
European stocks fell sharply on Thursday in the hours after the decision and ECB President Christine Lagarde’s press conference, and continued to slide on Friday, before U.S. inflation data compounded the losses.
The highly-anticipated May consumer price index report came in hotter than expected, with U.S. headline inflation hitting 8.6% year-on-year, outstripping economist expectations and the previous month’s figure.
“High prices may put pressure on consumer spending into the medium term. Add ongoing supply-chain problems and the economic impact of Russia’s invasion of Ukraine to the threat of inflation, and it’s easy to see why fears of a downturn have risen swiftly.”
Richard Flynn
Managing Director, Charles Schwab UK
The red hot inflation print resurfaced fears that the Federal Reserve may need to continue to be aggressive in its monetary policy tightening this year.
U.S. stock futures dropped sharply in morning trade following the report, while the 2-year Treasury yield surged above 3%.
Richard Flynn, managing director of Charles Schwab U.K., said the rate of inflation in May will cause concern that price rises are spiraling.
“In a bid to control price rises, the Federal Reserve has begun to aggressively tighten interest rates. Yet this fix creates its own risks and, even if inflation peaks soon, it’s unlikely to decelerate quickly. High prices may put pressure on consumer spending into the medium term,” Flynn said.
“Add ongoing supply-chain problems and the economic impact of Russia’s invasion of Ukraine to the threat of inflation, and it’s easy to see why fears of a downturn have risen swiftly.”
Shares in Asia-Pacific closed mixed on Friday as Chinese inflation data for May came in largely in line with expectations, and investors turned their attention stateside.
Back in Europe, the Central Bank of Russia on Friday cut its key interest rate by 150 basis points to 9.5%, the level seen prior to Russia’s invasion of Ukraine.
Although acknowledging that the external environment for the Russian economy remains “challenging and significantly restrains economic activity,” the Board said in a statement that “inflation is slowing faster and the decline in economic activity is of a smaller magnitude” than the central bank expected in April.
Meanwhile the Bank of England said on Friday that it is now satisfied that Britain’s banking giants are no longer “too big to fail,” after a concerted effort to de-risk the financial system in the wake of the taxpayer bailouts that rescued several lenders in 2007-09.
In terms of individual share price movement in Europe, Italy’s Banco BPM slid 11.8% to end the day at the bottom of the Stoxx 600, leading a broad decline for Europe’s banking sector.
Credit Suisse closed down 5.7% after State Street dismissed rumors that it is considering a takeover of the embattled Swiss lender.
Just Eat Takeaway climbed 5.3% after Bloomberg News reported that private equity firm Apollo is interested in acquiring its U.S. unit, GrubHub.
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