European stocks fall steepest since March as oil prices spike
What's the story
European stocks witnessed their steepest decline since March, with the Stoxx 600 index falling by 1.5% on Friday. The fall was largely due to rising bond yields and concerns over inflation fueled by a spike in oil prices. Risk-sensitive sectors such as banks, utilities, and real estate were particularly hard hit. However, energy shares gained amid the oil price surge while healthcare and consumer staples outperformed as investors sought defensive plays in these uncertain times.
Market reaction
Oil prices rise on US President Trump's comments
Oil prices surged past $109 a barrel after US President Donald Trump said the country isn't dependent on the Strait of Hormuz. The statement raised inflation concerns among investors. Further, markets were disappointed by Trump's meeting with China's Xi Jinping, which made little progress over the Iran war. Paul Skinner, investment director at Wellington Management, told Bloomberg TV that these factors could lead to more volatility in the market.
Regional impact
European stocks lag behind US and Asian counterparts
Since the onset of the Iran war, European stocks have lagged behind their US and Asian counterparts. This is because Europe is seen as more vulnerable to the effects of rising energy prices on inflation and economic growth. Money markets are now expecting three interest rate hikes this year from both the European Central Bank (ECB) and Bank of England (BoE).
Future outlook
ECB and BoE may respond to rising energy costs
Yannis Stournaras, a member of the ECB Governing Council, warned that borrowing costs could rise if oil prices remain high. Meanwhile, Huw Pill, chief economist at the BoE, hinted on Thursday that a rate hike might be necessary in the UK to combat inflation. These statements further indicate a possible tightening of monetary policy in response to rising energy costs and inflationary pressures.