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Inflation shock drives European stocks to 3-month lows

·2-min read
German share price index DAX graph is pictured at the stock exchange in Frankfurt

By Sruthi Shankar and Bansari Mayur Kamdar

(Reuters) -European stocks tumbled to three-month lows on Monday as a sharp rise in U.S. inflation raised concerns about aggressive interest rate hikes by the Federal Reserve.

The pan-European STOXX 600 index fell 2.4% to its lowest since March 7.

High-growth technology stocks dropped 4.2% as government bond yields hit multi-year highs on bets of a faster tightening of monetary policy, with economy-linked sectors such as travel & leisure and automakers also shedding 5.3% and 4.5%, respectively.

The mood turned dark following a sharp Wall Street sell-off on Friday after data showed U.S. consumer prices surged 8.6% in May, its biggest gain since 1981, raising worries about a bigger 75-basis-point rate hike at the Fed meeting this week.

"We have a lot of uncertainty... less growth, more inflation combined with concerns about central banks hitting the brakes quite hard," said Elwin de Groot, senior market economist at Rabobank.

The euro STOXX volatility index surged to a one-month high.

The STOXX 600 has shed nearly 16.5% since hitting a record high in January as fears about soaring inflation, policy tightening by central banks, and recent COVID-19 curbs in China raised worries about a potential recession.

"The wider concern is that central banks have no good options," said Michael Hewson, chief market analyst at CMC Markets UK.

"They are now on the horns of a dilemma, allow inflation to rise and be sticky for longer, or hike aggressively to get on top of inflation in order to be able to cut rates later down the line."

Asian stocks closed sharply lower on worries about fresh COVID lockdowns with Beijing's most populous district of Chaoyang announcing three rounds of mass testing to quell a "ferocious" coronavirus outbreak that emerged at a bar.

Euro zone banks dropped 3.1% on disappointment that the European Central Bank did not reveal any tool to support peripheral bonds at its meeting last week. [GVD/EUR]

The spread between Italian and German bond yields hit its widest levels since May 2020, sending an index of Italian banks down 3%.

Adding to the downbeat mood, the first round of runoff voting saw French President Emmanuel Macron hold a razor-thin edge over the left in lower house elections.

France's biggest banks such as BNP Paribas, Societe Generale and Credit Agricole fell between 4% and 4.7%.

Among other single stocks, French drugmaker Valneva plummeted 25.3% after it warned about the prospects for its COVID-19 vaccine.

(Reporting by Sruthi Shankar and Bansari Mayur Kamdar in Bengaluru; Editing by Subhranshu Sahu, Shailesh Kuber and Shinjini Ganguli)

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