Europe: Shares slide as hawkish hints ruffle rate-sensitive sectors

[LONDON] European shares logged their biggest one-day loss in nine months on Thursday as interest rate-sensitive sectors were hit by a rising hawkish chorus from central banks globally.

The pan-European Stoxx 600 index ended 1.3 per cent lower, extending falls just before the US market open, while European blue chips fell 1.8 per cent.

Signals that central bankers are becoming more hawkish sent bond yields rising, which weighed on defensive, dividend-paying sectors including Europe's personal and household goods sector, health care and food and beverages, which were all down 2 per cent or more.

Utilities were also down 1.8 per cent, led lower by Germany's RWE and Uniper, which both fell around 3 per cent.

These sectors suffer as growing expectations of rate hikes make their constant dividend flows less attractive.

"The fact is that rising rates put at risk the global carry trade and fuel volatility," said Giuseppe Sersale, fund manager at Anthilia Capital in Milan.

On Tuesday European Central Bank President Mario Draghi indicated that the central bank could begin to tighten monetary policy, though sources said on Wednesday that Mr Draghi had been overinterpreted by markets.

Likewise Bank of England Governor Mark Carney said on Wednesday that a rise in British interest rates is likely to be needed as the economy comes closer to running at full capacity.

Receding political risks, an improving economy and a rebound in corporate earnings have fuelled investor appetite for the bloc's equities, with European shares seen racking up double digit gains this year, according to a Reuters poll of investors.

However, Europe's new-found popularity means that any pullback can hit its stocks particularly hard.

"Europe is more at risk because it's the consensus trade while positioning on Wall Street is more balanced," Anthilia Capital's Mr Sersale added.

A potential turn towards a tightening in policy has also seen investors begin to favour cyclical stocks once more, with broker UBS downgrading European utilities, saying that valuations of cyclicals looked more attractive again.

Only two sectors, banks and basic resources made any gains, up 0.5 per cent and 0.4 per cent respectively.

Banks rose for a fourth straight session after the US Federal Reserve cleared capital return plans from big banks.

Among banks given the Fed green light were also US units of Deutsche Bank, HSBC and Santander.

The Germany heavyweight lender was also supported by news that a US federal judge dismissed a lawsuit accusing it of concealing major deficiencies in its anti-money laundering controls as part of a US$10 billion Russian trading scheme.

HSBC, which hit a four-year high, was also upgraded to "overweight" by Morgan Stanley which forecasts the bank to have US$45 billion in excess capital by 2019.

"We expect the narrative on HSBC to flip from prior concerns on the dividend to a debate on how to deploy excess capital," Morgan Stanley said.

REUTERS