European Equities Slide Most in a Month on Fed, China Worries

(Bloomberg) -- European stocks slumped after the Federal Reserve signaled a tapering of stimulus starting this year and worries about China’s crackdown sparked a selloff in luxury shares.

The Stoxx Europe 600 index dropped 1.5% at the close, the most in a month. Miners slid 4.2% for the worst sector performance. Luxury shares LVMH, Richemont and Kering SA tumbled after Chinese state media said President Xi Jinping offered an outline for “common prosperity” that puts some of the country’s wealthiest citizens on notice. That hurt France’s CAC 40 Index, which fell 2.4%.

For Bank of America investment strategist Milla Savova, increasing signs of a softening in global growth momentum and the prospect of reduced stimulus from the Fed is weighing on stocks today. “This ties into our belief that the ‘goldilocks’ environment of accelerating growth and a falling discount rate that has benefited European equities since last March has come to an end,” she said.

Investors are turning more risk averse after sending the Stoxx 600 to 10 straight records earlier this month, with minutes from the Fed’s last meeting showing that most officials agreed they could start slowing the pace of bond purchases later this year. That’s adding to worries about the spread of Covid-19 variants, China’s regulatory crackdown and turmoil in Afghanistan. 

“European equities have recently seen their longest winning streak in over a decade so a pullback is not surprising at this point -- markets have become tactically overbought,” said Hani Redha, a portfolio manager at PineBridge Investment. “A sharper slowdown in China is an important risk for equities in the coming months.”

In Europe, buy-the-dip sentiment has reigned supreme after bouts of stock volatility so far this year. The Stoxx 600 has gone without a 5% drop for 138 days, the longest streak since 2017.

“Looking into the next weeks and month, I would expect markets to remain range bound with Fed worries piling onto worries about a Chinese growth slowdown and the spread of the delta variant,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital.

On Thursday, miners tumbled amid a rout in iron ore as China sought to cut steel production, while carmakers were also weighed down by a report that chip shortages will force Japanese peer Toyota Motor Corp. to cut its global production in September.

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