European markets fall as traders watch rising COVID cases and expected rate hikes

European markets fall as traders watch rising COVID cases and expected rate hikes
The sour mood came after London’s benchmark index bucked the overall muted trend last week to rise 1.3%. Photo: Jack Taylor/Getty

European stock markets had a downbeat session on Monday amid a burst of new reported coronavirus cases and the impact of earlier than expected rate hikes in the US.

In London, the FTSE 100 (^FTSE) fell 0.4% on the day, while the French CAC (^FCHI) tumbled 1.3% and the DAX (^GDAXI) was 1.1% lower in Germany.

Oil and gas stocks managed to outperform while household goods remained under pressure as well as a slump for housebuilders. 

The UK government is reportedly looking for property developers to take on a greater share of the costs of repairing dangerous apartment blocks in the wake of the Grenfell tragedy of 2017.

"Many flat owners have been left with onerous costs for replacing flammable cladding and the latest reports on who will foot the bill should come as no surprise to the sector in that context," AJ Bell investment director Russ Mould said.

"The housebuilders have benefited from generous incentives, such as Help to Buy and the mortgage guarantee scheme, in recent years. However, state support is not a one-way street and the sector needs to do its bit to look after its customers."

The sour mood comes after London’s benchmark index bucked the overall muted trend last week to rise 1.3%. An initial 5% hike in the price of oil has lifted the majors, with Shell (RDSB.L) regaining its place as the largest FTSE 100 company by capitalisation.

“The banks are also being boosted on the possibility of a rising interest rate environment,” Richard Hunter of Interactive Investor said.

“Equally, the sector has more recently come into vogue on valuation grounds, with investors considering the banks to be sitting on relatively cheap valuations, and with the currently preferred picks being Barclays (BARC.L) and Lloyds (LLOY.L). Further colour may also arise from the US banks later in the week on a read across basis.”

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Across the pond, the S&P 500 (^GSPC) dipped 1.4% and the Nasdaq (^IXIC) fell more than 1.7% as the rotation out of tech stocks continued. The Dow Jones (^DJI) edged 1.2% lower by the time of the European close.

It came after stocks closed in a sea of red on Friday as US data showed fewer new jobs than expected were created last month, although wages saw a strong gain.

The US 5-year treasury yield hit fresh two-year highs, the 10-year yield hit the highest since January 2020 and the Nasdaq Composite closed 3 percentage points away from correction territory, suffering its biggest weekly drop in over a year.

Fawad Razaqzada, analyst at ThinkMarkets, said: "Investors are wondering what 2022 means for assets inflated with government and central bank liquidity during the pandemic, with technology and cryptocurrencies being the obvious focal points.

"So far, they have shown a clear desire to move into value and away from low-div-yielding stocks, as bond yields climb across the board as we get closer to the time of lift off. Investors are pricing in a Fed hike in as early as March."

Meanwhile, the International Monetary Fund (IMF) warned on Monday that emerging economies must prepare for policy tightening by the US Federal Reserve after inflation hit a near 40-year high.

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“Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally," the IMF said.

“These developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.”

Further clues will come later this week as the latest inflation reading is due.

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Asian markets fluctuated on Monday after the negative performance on Wall Street on Friday.

In Japan, the Nikkei (^N225) ended flat on the day while the Hang Seng (^HSI) rose 1.1% and the Shanghai Composite (000001.SS) was 0.4% higher.

Singapore also continued its positive start to the year with another healthy gain while there were also advances in Taipei, Manila and Jakarta. However Sydney, Seoul and Wellington dipped.

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