Europe: Stocks rocked by return of volatility after summer lull

[LONDON] European stocks fell sharply on Friday, dropping suddenly in afternoon trade following a sell-off on Wall Street as investors reacted to less dovish than expected signals from central bankers on both sides of the Atlantic.

The pan-European Stoxx 600 index was down 1.1 per cent, the biggest one-day fall for the index since the start of August, after a summer which has seen a tight trading range persist for two months.

The fall added to a pullback from the previous session after some investors expressed disappointment at the fact that the European Central Bank (ECB) had not discussed an extension of the timetable for its economic stimulus programme at its policy meeting on Thursday.

European stocks fell sharply along with Wall Street after US Federal Reserve official Eric Rosengren, traditionally viewed as a dove, said there were risks associated with not raising rates soon. Some traders said a nuclear test by North Korea had also hit sentiment.

The dollar rose as investors speculated that a September rate hike had become more likely, and German 10-year bond yields rose above zero for the first time since June as investors assessed the difficulties that central banks face.

"The lack of action by the ECB yesterday and the comments by (president) Mario Draghi put equity market participants on edge a little bit," said Manoj Ladwa, head of trading at TJM Partners.

"And there's still a ...possibility that we could see a Fed rate hike by December, and the market still needs to price that in... So maybe this rally has run its course for the time being."

Europe's Stoxx 600 had hit an eight-month high on Monday, but ended the week down 1.4 per cent.

US volatility index VIX, which is a crude measure of investor caution, surged to its highest level since July. The European equivalent ticked up to a lesser extent, to a one-week high.

Falls were broad based, with every sector bar financials, which have suffered from lower interest rates, in negative territory.

Retail stocks fell 2.1 per cent, led by a 4.6 per cent drop in Inchcape after Exane BNP Paribas cut its rating on the stock to neutral from outperform.

Novo Nordisk fell 2.2 per cent after JP Morgan cut its rating on the stock to "neutral" from "overweight".

Shares in British pub operator Greene King fell 6 per cent, the top Stoxx 600 faller, after the company warned trading conditions could get tougher following Britain's 'Brexit' vote in June to quit the European Union.

Shares in French company Rubis - which specialises in the petroleum and chemicals sector and operates storage facilities - rose 7.7 per cent to a record high after posting higher interim profits.

REUTERS