European stocks set for worst week since March as rate rises stoke recession fears

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European stocks fell on Friday, extending their declines for the week and edging towards their worst week since March, as traders worried that central banks’ efforts to curb sticky inflation will lead to recessions.

Europe’s region-wide Stoxx 600 fell 0.4 per cent at the market open, while Germany’s Dax lost 0.8 per cent and London’s FTSE 100 was down 0.6 per cent.

The moves came a day after policymakers across the region turned more hawkish in their fight against stubborn inflation, as the central banks of Switzerland, Norway and the UK increased their benchmark interest rates.

Across the Atlantic, the US Federal Reserve chair Jay Powell stuck to the trend as he signalled that the central bank could opt for two more quarter-point rate increases by the end of the year. Economists have warned that the price for taming inflation may be recessions in large economies around the world.

The decline in global stocks came with “the dawning realisation for investors that central banks are set to keep hiking rates into the second half of the year,” said Henry Allen, macro strategist at Deutsche Bank.

“At the same time, the latest data aggravated fears about a potential recession, which further damped risk appetite,” added Allen. 

Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 lost 0.3 per cent ahead of the US open. 

France’s flash purchasing managers’ index, a survey of activity in manufacturing and services sectors, fell more than expected to 48 in June. A reading above 50 indicates expansion compared with the previous month, while one below 50 means a contraction.

Germany’s federal statistics office reported that in the first quarter of this year house prices fell at the fastest annual rate since its records began in 2000, in a sign that high borrowing costs and weakening economic growth were taking their toll on Europe’s largest property market. The yield on the two-year German Bund fell 0.1 percentage points to 3.15 per cent. Yields fall when bond prices rise.

Meanwhile, Japan’s Topix index dropped 1.4 per cent, after an important gauge of Japan’s consumer prices rose at its fastest pace in 42 years in May, increasing the challenges for the central bank as inflation has proved stickier than expected.

The core consumer price index, which excludes volatile energy and food prices but includes alcoholic beverages, increased at an annual rate of 4.3 per cent, the fastest pace since June 1981. 

Elsewhere in Asia trading was muted as stock exchanges in China and Hong Kong were closed on Thursday and Friday for the Dragon Boat Festival.