European Stocks Fall as Growth Recovery Risks Weigh on Sentiment

(Bloomberg) -- European equities fell on Friday, as an underwhelming U.S. jobs report cast doubt on the strength of the world’s biggest economy, adding to signs that global recovery is losing steam amid surging prices and supply bottlenecks.

The Stoxx Europe 600 Index dropped 0.3%, paring this week’s rebound to 1%. Chip stocks including ASML Holding NV and STMicroelectronics NV weighed on the tech sector after AAC Technologies, one of Apple Inc.’s Asian suppliers, gave a profit warning. The sector was also under pressure as the U.S. 10-year Treasury yield surged to 1.6%, fueling investor exit from frothier shares. 

Energy stocks were the biggest gainers as oil prices surged past $80 for the first time since November 2014, extending their rally into a seventh consecutive week. 

The main European equities benchmark has been on a rollercoaster ride since mid-August, when it reached a record high. After six consecutive quarters of gains -- the longest winning streak since 2006 -- valuations are stretched, and the outlook has been clouded by a spike in inflation, rising bond yields, signs that global growth is now past its peak, and persistent supply bottlenecks.

“Many factors are worrying the markets, including the slowdown in economic growth, inflation and geopolitical risks,” said Louise Dudley, global equities portfolio manager at Federated Hermes. “In general, it can be said that value and cyclical areas of the market are still undervalued, while growth stocks are still overbought.”

Read More: BofA Sees More Downside Risks Ahead for European Equities

U.S. job growth in September was the slowest this year, signaling a tempering of the labor market recovery and complicating a potential decision by the Federal Reserve to begin scaling back monetary support before year-end. While the U.S. Senate approved legislation that pulled the world’s biggest economy from the brink of payments default, the payrolls report showed that the country’s job market may be too weak for the Fed to start tapering its bond purchases. 

“The Fed doesn’t seem to need much to convince it that tapering should begin imminently, but at just 194,000, jobs numbers are suggesting that the labor market is further from hitting the substantial progress goal than they expected,” said Seema Shah, chief strategist at Principal Global Investors. 

Still, despite the rising risks some strategists and investors see upside for European stocks. 

Read More: Goldman Sees High Bar for Stoxx 600 Upside Earnings Surprises

“We expect European equity markets to recover and end the year higher as the market switches focus from macro concerns, such as high energy prices and discussion around the U.S. debt ceiling, back to the micro and corporate profitability,” said Nick Nelson, head of global and European equity strategy at UBS Group AG. “We see it as no coincidence that the current pullback in markets happened in between reporting seasons.”

Weir Falls on Cyberattack, Daimler Rises: EMEA Equity Movers

Among individual movers, Daimler AG rose to the highest since December 2015 after UBS upgraded its stock to buy from neutral. Weir Group Plc shares fell to the lowest since November, after the U.K. machinery maker announced that a ransomware attack will affect full-year profitability.

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