European stocks plummet from record highs on hawkish Fed

By Anisha Sircar and Ambar Warrick

(Reuters) -European stocks tumbled from record highs on Thursday as hawkish signals from the minutes of the U.S. Federal Reserve’s December meeting battered technology shares with the prospect of rising interest rates.

The pan-European STOXX 600 index closed 1.3% lower, erasing all gains made in a rally that pushed it to record highs in the first three sessions of the year.

On Wednesday, Fed minutes showed a tight job market and unrelenting inflation could require the U.S. central bank to raise interest rates sooner than expected and begin reducing its overall asset holdings.

European technology stocks were among the biggest decliners in the region, falling 2.4% as the prospect of higher rates made future earnings appear less attractive.

“There is the potential for more volatility at the start of the year, and the Fed minutes fed into that volatility, but it’s not indicative of a sudden, negative shift in investor sentiment,” said Craig Erlam, a senior market analyst at OANDA.

“I think it’s (the tech rout) an overreaction to the minutes. Even if that lasts a day, two days, three days, I don’t think it’s going to have a firm effect in the long term.”

Data showed German annual inflation slowed in December, but remained well above the European Central Bank’s target range. A mix of inflation fears, rising interest rates and the spread of the Omicron COVID variant has spooked investors in recent sessions.

Banks and insurance stocks were the sole gainers for the day, rising 1.1% and 0.2%, respectively. The sectors stand to benefit from improving margins due to higher lending rates.

Trade in euro zone money markets suggested investors were positioning for a rate rise from the European Central Bank as early as October, and another in December.

Adding to worries, a French government spokesperson said a “supersonic” rise in COVID-19 infections was set to continue in the coming days and there were no signs of the trend reversing.

In some good news, data showed higher demand drove a bigger-than-expected rebound in German industrial orders in November.

Among stocks, Societe Generale’s car leasing division ALD climbed 8.4% after agreeing to buy rival LeasePlan for 4.9 billion euros ($5.5 billion) to give it more scale as the rental market moves towards electric vehicles.

French grocer Carrefour jumped 6.3% to the top of the STOXX 600, after a report of a fresh bid for the retailer from rival Auchan.

(Reporting by Anisha Sircar in Bengaluru; Editing by Shounak Dasgupta, Subhranshu Sahu, William Maclean)