European shares suffer worst selloff of the year on recession fears

© Reuters. FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, January 12, 2023. REUTERS/Staff

By Ankika Biswas, Bansari Mayur Kamdar and Sruthi Shankar

(Reuters) -European shares recorded their worst single-day selloff of the year on Thursday, as disappointing earnings reports, weak U.S. economic data and hawkish comments from central bankers rekindled fears of a global economic slowdown.

The pan-European STOXX 600 index fell 1.6%, breaking a six-day winning streak and marking its biggest percentage loss since December 15.

Rate-sensitive technology stocks led losses in the region, down 2.9%, as their Wall Street peers also dropped. Retail, industrial, mining and oil & gas all fell more than 2% each.

U.S. stocks tumbled for a second day after data showed U.S. manufacturing output slumped last month and retail sales dropped by the most in a year, while hawkish comments from Federal Reserve officials sparked worries that interest rates will keep rising. [.N]

"Has global inflation peaked? It certainly seems so, with CPI numbers across most major economies declining slightly month-on-month, helping to ease fears of a global recession," said Geir Lode, head of global equities at Federated Hermes (NYSE:FHI).

"However, despite a glint of optimism about the health of the global economy, we worry that this upcoming earnings season could bring more pain for investors. We expect the inflationary environment over the previous quarter to impact corporate profitability, which could lead to negative surprises across the board, especially in the U.S."

Spain's Bankinter slipped 2.9% as the lender hit its net profit target in 2022, a year ahead of schedule, though higher costs took some of the shine off a strong final quarter.

Boohoo fell 10.5% after the British online fashion retailer's revenue fell 11% in its key Christmas trading period, hurt by delivery disruption and tough comparatives.

Dr Martens Plc slumped 30.7% to a record low after the British bootmaker warned on annual profit and revenue due to operational issues.

Fourth-quarter earnings in Europe are expected to increase 10.7% year-over-year, according to Refinitiv I/B/E/S data, compared with 59.2% jump in the year-ago quarter. Further earnings deterioration is forecast this year amid worries of a recession.

Adding to the downbeat mood, the European Central Bank pushed back against market bets that it would slow the pace of its interest rate hikes.

ECB President Christine Lagarde and fellow policymaker Klaas Knot said investors were underestimating the central bank's determination to bring inflation in the 20-nation euro zone back to its 2% target, from 9.2% last month.

While a 50-basis-point hike by the ECB for February is fully priced in, traders are oscillating between 25 and 50 bps rate hike for March on hopes of less-aggressive moves by the Fed.

Among other stocks, Renault (EPA:RENA) slipped 2.1% as HSBC cut the French carmaker's stock rating to "hold" from "buy".

Zur Rose fell 2.2% even as the Swiss online drug retailer said it expected a smaller full-year core loss than previously forecast.