Europe Stocks Plunge to Two-Year Low as Bear Market Draws Closer

(Bloomberg) -- European equities failed to sustain the optimism from Wednesday’s rally in U.S. stocks, as the region’s markets slumped after the Christmas holiday amid elevated volatility and thin volumes.

The Stoxx Europe 600 Index extended losses to 1.7 percent, the lowest level since November 2016, after reversing opening gains of 0.5 percent. Leveraged sectors such as utilities and real estate paced the retreat, along with trade-sensitive industries, such as miners and automakers. The Euro Stoxx 50 Index fell 1.2 percent, closing in a bear market.

All sectors were in negative territory as markets resumed trading after the holidays on Tuesday and Wednesday. The Stoxx Europe 600 Index’s 14-day relative strength index fell below the level of 30, which to some analysts signals that the security is oversold and poised to recover.

European equities are set for their worst year since the 2008 financial crisis as a mix of political and economic concerns have fueled outflows of about $70 billion from the region’s stock funds. Although the S&P 500 Index soared the most since 2009 on Wednesday on signs of robust consumer spending, fewer concerns about the tenure of the Federal Reserve chief and progress on U.S.-China trade talks, the VIX Index advanced and U.S. shares dropped on Thursday.

“It’s a combination of nervousness, growth fears and in particular Brexit uncertainty. Liquidity is very thin, and political risks are more severe for Europe,” Ulrich Urbahn, head of multi-asset strategy and research at Berenberg in Frankfurt, said by email. “The hope is that with some re-balancing flows at the end of the year and new risk budgets at the beginning of next year, markets will find a bottom.”

The European volatility gauge, VSTOXX Index, was up 26 percent on Thursday, trading at levels recorded in February, when investors first saw major corrections in global equity markets. Political issues in Europe this year have spanned the U.K.’s failure to vote on Prime Minister Theresa May’s Brexit deal, Italian budget squabbles as well as French protests and uncertainty over Germany’s future after Chancellor Angela Merkel outlined her eventual plans to leave office.

The worst-performing sector this year in Europe is banks, with a loss of 30 percent, due to lender-specific developments such as a regulatory raid on Deutsche Bank AG as well as investor disappointment over the European Central Bank’s decision to prolong unchanged interest rates. Automakers are the second-worst performers, down 29 percent due to uncertainty over U.S. tariffs on a broad range of imported vehicles and the U.S.-China trade war.

“The trade issue is still a very big one,” said Tim Graf, head of EMEA macro strategy at State Street Bank & Trust Co.

--With assistance from Michael Msika.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Monica Houston-Waesch

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