(Bloomberg) -- European equities declined as policymakers stoked investor worries about the risks from faster inflation to corporate profits.
The Stoxx Europe 600 Index fell 1% by the close in London, with most sectors in the red. Energy shares were among the worst performers, tracking oil lower. Wind-turbine makers slumped after Siemens Gamesa Renewable Energy SA said the rising price of materials like steel would hit its bottom line. Retailers also underperformed after Asos Plc warned of softening sales.
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With European stocks hovering near a record, investor optimism in the recovery is being tested by concerns about price pressures, rising rates and the anticipation of eventual monetary policy tightening. Market players are carefully tracking comments from top monetary officials to get a sense of when they might start reducing support measures that have powered the rally in risk assets.
Federal Reserve Bank of St. Louis President James Bullard said the central bank has met its inflation and employment goals and urged policy makers to move forward in reducing stimulus. Federal Reserve Chair Jerome Powell, however, said it was still too soon to scale back stimulus, while acknowledging that inflation has risen faster than expected. And in the U.K., inflation could peak near 4%, Bank of England Deputy Governor Dave Ramsden said.
“Expect more volatility in the market over the coming days, but the base case for equities remains -- it will trend higher, central banks are not going to tighten monetary policy anytime soon,” said Manish Singh, chief investment officer at Crossbridge Capital. “The fear of inflation spike will recede and the central banks will be under less pressure to tighten monetary policy.”
The European spread of the Covid-19 delta variant “is leading to reinstatement of restrictions,” Singh said. “This is going to have a damping effect on economic data too.” But he adds that “the vaccine is working and the higher the vaccination rate the sooner things will go back to normal.” Until then, central banks will be in no rush to taper their asset purchases, Singh added.
Traders are also watching the start of the reporting season for cues on the corporate recovery. Asos slumped 18% after the online fashion retailer said sales started to soften, particularly in Britain, at the tail end of the third quarter as a result of poor weather, supply chain pressures and continued uncertainty over Covid-19. Peers Boohoo Group Plc and Zalando SE also dropped.
“We expect a roller coaster ride on the stock markets during the summer,” said David Wehner, portfolio manager at Do Investment, explaining that though many investors are “very optimistic” after the record-breaking first half of the year, the market is caught up in the tensions of concerns over new Covid-19 variants, rising inflation rates, “expansive central banks carefully testing the exit, technically overbought markets and a globally divergent economy.”
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