European shares tripped 1.6% on Tuesday, retreating from two-week highs hit earlier in the session, as hotter than expected U.S. inflation data cemented bets for another large interest rate hike by the Federal Reserve.
Interest rate-sensitive tech stocks weighed the most, down 3.2%, while real estate names lost 3.9%. The defensive utility sector was the sole gainer among major sub-sectors in Europe.
U.S. headline inflation came in at 8.3% in August, rising more than expected, and underlying inflation picked up amid rising costs for rents and healthcare, giving the Fed ammunition to deliver a third 75 basis points interest rate hike next Wednesday.
The pan-European STOXX 600 index snapped a three-session wining streak, while Germany’s DAX dropped 1.6%, giving up gains that had taken it to near four-week highs earlier on Tuesday.
“The Fed is the U.S. central bank, but it’s the central bank to the world. And when it’s draining liquidity, that has got impacts for asset valuations everywhere,” said Patrick Armstrong, chief investment officer at Plurimi Wealth.
“Interest rate sensitive stocks in Europe (such as) the tech stocks were really hit hard. Higher interest rates really changes the potential growth for those kind of companies.”
Last week, the European Central Bank delivered a surprisingly large 75 basis points rate hike, in the clearest sign yet that it will not budge in its fight against inflation.
Tech stocks have lost almost 30% so far this year – among the sharpest sectoral decliners in Europe after real estate and retail names - as investors positioned for a high interest rate environment amid a post pandemic inflation surge.
Among gainers on Tuesday were shares of British software maker Aveva Group Plc which climbed 3.1% after reports that French industrial group Schneider Electric was nearing a deal to take full control of Aveva for about 3.5 billion pounds ($4.1 billion).
UBS Group AG rose 0.7% on plans to increase its dividend by 10% to $0.55 per share.
The STOXX 600 retail index lost 3.5% after British online supermarket Ocado Retail, a 50:50 joint venture between Ocado Group and Marks & Spencer, said it expected a small sales decline over the full 2022 year.