European stocks on Thursday closed near the lows of the day, with selling accelerating in the afternoon as U.S. stocks slumped at the start of their regular trading session, extending a downturn begun following the Federal Reserve’s Wednesday policy update on inflation and economic health.
Investors were also sifting through a clutch of corporate earnings reports, while weighing up a surprise fall in eurozone inflation.
How markets are moving
The Stoxx Europe 600 index SXXP, -0.73% ended down 0.7% at 384.62, logging its lowest close since April 26, according to FactSet data. On Wednesday, the index rose 0.6% for its highest finish since Feb. 2.
Germany’s DAX 30 DAX, -0.88% fell 0.9% to 12,690.15, following Wednesday’s jump of 1.5%. France’s CAC 40 PX1, -0.50% dropped 0.5% to 5,501.66.
The U.K.’s FTSE 100 UKX, -0.54% fell 0.5% to 7,502.69 after scoring its fifth win on Wednesday.
The euro EURUSD, +0.0083% bought $1.1966, compared with $1.1950 late Wednesday in New York.
What’s driving the market
The pan-European Stoxx 600 benchmark edged back from a two-month high as European stock investors were getting the first chance to react to the Federal Reserve’s statement released late Wednesday. Policy makers said readings for both headline and core inflation have moved close to the central bank’s 2% target.
But traders found little clarity in the statement about how that view would change the expected pace of rate hikes from the U.S. central bank this year. The Dow Jones Industrial Average DJIA, +0.02% initially rose after the statement but eventually finished lower, and losses continued on Thursday. The Dow tumbled about 380 points, on track for a fifth straight session in the red.
“The U.S. central bank didn’t rule out three more interest rate hikes this year, but at the same time it wasn’t overly bullish in terms of its growth outlook,” said CMC Markets analyst David Madden in a note.
The prospect of higher borrowing costs for corporations and consumers, as well as dollar strength on expectations of rate hikes, can ripple through equity markets world-wide.
While the Fed has flagging rising inflation, the annual rate of inflation in the eurozone fell short of expectations on Thursday, coming in at 1.2%. A slowdown in inflation and economic growth so far this year could lead the ECB to be cautious as it decides whether to start winding down its stimulus measures.
Meanwhile, investors will keep watch for any developments from Beijing, where U.S. and Chinese officials have begun discussions on tariffs and other trade issues.
What are strategists saying?
“It was only last week that ECB President Draghi said he would watch the economic data in the months ahead with ‘caution’ and following the release of the latest eurozone Inflation print, which missed expectations and recorded a 14-month low (1.2%), he may need to,” said Anthony Kurukgy, senior sales trader at Foenix Partners, in a note.
“The latest number won’t help euro hawks calling for a change to monetary policy in 2018 as the ECB may need to delay their ambitions well into next year, unless headline Inflation starts to pick up in the medium term,” he added.
Stocks in focus
Smith & Nephew PLC SN., -7.00% stock dropped 7% after the medical device maker lowered its full-year guidance for revenue. The company said first-quarter revenue was flat on an underlying basis after a mixed performance.
Bayer AG BAYN, +0.17% ended up 0.4%, sloughing off earlier losses that came after the company lowered its 2018 guidance after first-quarter net profit was weighed down by adverse currency swings.
Adidas AG ADS, -6.03% the German athletic shoes and clothing maker, confirmed its outlook for 2018 and said first-quarter net profit rose to 540 million euros ($647.2 million), helped by strong sales in North America. Shares, however, ended 6.8% lower
Economic docket
The European Union’s statistics agency said Thursday that consumer prices were 1.2% higher than in April 2017, a fall from the 1.3% rate of inflation recorded in March. The unexpected drop is a setback for the ECB, which has a target of just below 2% for inflation.
The central bank is considering when and whether to pull back in its stimulus program, and in January, it cut its monthly bond buying in half after a run of strong economic data.
Meanwhile, in the U.K., a reading on service-sector activity came in lower than expected, in another sign of slowing in the British economy. The services purchasing managers index from IHS Markit/CIPS came in at 52.8 in April, compared with 53.4 forecast. It was up from 51.7 in March, a 20-month low.
