European Stocks Drop Most in Two Months on China, Fed Concerns

(Bloomberg) -- European stocks had their worst decline in two months as China’s real estate crackdown and tapering worries ahead of this week’s Federal Reserve meeting fueled risk-off sentiment.

The Stoxx Europe 600 index closed 1.7% lower in London after falling as much 2.5% earlier and nearing the biggest decline since October. Germany’s DAX slumped 2.3% on the day the index’s expansion took effect, with banks and automakers underperforming. 

Miners were among the worst-hit sectors today, sliding to the lowest level since February as iron ore’s rout deepened and base metals fell. Financial sectors--banks and insurance--were the top decliners as Treasury yields slumped. 

Growing investor angst about China’s real estate crackdown rippled through markets on Monday, pummeling Hong Kong developers. These concerns add to mounting investor worries over rising inflation, pullback in stimulus measures and Covid-19 risks. 

Today’s retreat is fueled by fears of contagion from the intensifying debt crisis at China Evergrande Group, according to Milla Savova, a strategist at Bank of America Corp. Any fallout from the developer’s problems could hurt China’s economic growth prospects, which could in turn weigh on the global sentiment. 

“The Evergrande saga fuels investor concerns about rising credit stress in China and its negative impact on the country’s growth outlook,” Savova said. “For now our expectation is that the risks would be contained,” allowing for a rebound in Chinese growth momentum during the fourth quarter, she said.

The Stoxx 600 has been retreating from a record high reached in August as investors focus on risks ahead. All eyes will be on Wednesday’s Federal policy statement, with officials expected to signal a move toward scaling back stimulus.

“Worsening sentiment out of China, and a ratcheting up of geopolitical tensions has led to the pullback,” Altaf Kassam, State Street EMEA head of investment strategy & research, said by email. “With a raft of central bank meetings and announcements this week and soon after, the market is becoming nervous that the ‘transitory’ inflation narrative will be undermined by continued strong inflation data, leading to an earlier-than-expected policy tightening.” 

Meanwhile, the VSTOXX European volatility index jumped to the highest level since February.

Alberto Tocchio, a portfolio manager at Kairos Partners, doesn’t think there will be “a contagion effect” on other continents from China’s crackdown.

“A correction was due and is healthy after one of the biggest uninterrupted rallies in history, which will eventually resume,” Tocchio said. Other factors denting investor confidence in the near-term include inflation and the slowdown in economic growth, he said.

Astra Rises on Drug Trial, Cement Shares Dip: EMEA Equity Movers

Among the biggest individual movers, luxury stocks including LVMH and Kering SA declined amid persistent worries over China’s slowing growth. Also, Prudential Plc sank as much as 9.2% after news of a share placing came on what an analyst called the worst day possible.

Meanwhile, AstraZeneca Plc was the biggest decliner on the Stoxx 600, rising the most since November, after the pharmaceutical group released positive results from trials of its Enhertu breast cancer drug. The stock helped the FTSE 100 Index outperform European peers.

International Consolidated Airlines Group SA and Deutsche Lufthansa AG were among European airlines that jumped on the news that the U.S. will soon allow entry to most foreign air travelers as long as they’re fully vaccinated against Covid-19.

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