Weekly Market Outlook

European Stocks Retreat Amid Concern Over Central Bank Policy

European stocks headed for their biggest loss since the aftermath of Brexit amid investor concern that central banks may be less willing to continue supporting economic growth with loose monetary policy.

The Stoxx Europe 600 Index lost 1.9 percent to 338.93 at 9:26 a.m. in London. All major western-European stock markets and industries dropped. The VStoxx Index tracking euro-area equity volatility headed for its biggest jump since January, signaling a return of instability after an extended period of calm in financial markets. Spain’s IBEX 35 Index, Greece’s ASE Index and Italy’s FTSE MIB Index fell the most today, losing at least 2.3 percent.

The rally that pushed the Stoxx 600 up as much as 14 percent from a Brexit-induced low sputtered last week amid waning confidence that central banks will maintain or augment stimulus, following European Central Bank President Mario Draghi’s downplaying of the need for additional support. Federal Reserve Bank of Boston President Eric Rosengren also warned that the U.S. economy could overheat if policy makers wait too long to tighten.

“It was only a matter of time for this selloff,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. “We had seen post-Brexit a really notable rebound in markets, even if fundamentals hadn’t improved accordingly. There’s also the risk of the Fed meeting coming up, because there is very little potential positive impact of the Fed postponing a rate hike, but on the other side, if there were a negative surprise, there could be some downside.”

Investors will look today to Fed Governor Lael Brainard — seen as a leading opponent of rate increases — for further indications of the likely trajectory of interest rates in the world’s biggest economy before the Sept. 20-21 policy meeting. Any hawkish shift in her tone may spur volatility in financial markets, which put the odds of a hike in borrowing costs this month at 30 percent.

Miners posted the worst performance of the 19 industry groups on the Stoxx 600 today as commodity prices dropped. Energy companies slid as oil extended declines after U.S. producers increased drilling.

Among stocks moving on corporate news:

  • Linde AG tumbled 7.7 percent after saying it terminated talks for a combination with Praxair Inc. that would have created the world’s largest supplier of industrial gases.
  • RWE AG fell 2.9 percent after confirming plans for an initial public offering of Innogy SE shares in the fourth quarter.
  • SVG Capital Plc jumped 14 percent after HarbourVest Global Private Equity Ltd.offered to buy it for about 1 billion pounds ($1.3 billion) in cash.