Inflation threat deepens European equity sell-off

European stocks suffered a sharp sell-off on Monday as growing inflation expectations and rising bond yields took their toll on equity markets. Europe's STOXX 600 fell 1.6 percent to close at its lowest level since mid-November 2017. It was its sixth straight day of declines for the STOXX, while euro zone stocks fell 0.6 percent.
Among major European equity markets, only Spain and Italy are still higher than at the turn of the year, with Britain the worst performer. German bond yields hit a two-year high as fears of inflation drove a sustained sell-off in bond markets.
"Many sentiment and technical indicators were suggesting the market was overbought in late January, so part of this sell-off can be attributed more to technical than fundamental factors," said Edward Park, investment director at Brooks Macdonald.
All sectors were in the red on Monday, but the rise in bond yields particularly hit sectors with high-dividend paying stocks known as 'bond proxies'. Europe's personal and household goods index and telecoms both fell more than 2 percent. Company earnings provided little solace to investors. Ryanair fell 2.7 percent after the airline struck a cautious tone about fares and potential disruption from pilot unions, though it reported rising profits.
Gold miner Randgold Resources dropped 7.4 percent after saying that it was fighting to prevent the adoption of a new mining code in the Democratic Republic of Congo (DRC). Randgold Resources also doubled its dividend after profits rose 14 percent in 2017. Overall Europe has so far seen more earnings misses than beats for the first time since the fourth quarter of 2014, Morgan Stanley analysts said.
While the earnings season was still in its early days, Morgan Stanley also found post-results price performance showed a clear negative skew, indicating investors are quick to punish companies for missing earnings and sales expectations. Analysts began revising earnings down last week, I/B/E/S data showed, as the equities sell-off deepened. Fiat Chrysler fell 3.6 percent after sources told Reuters late on Friday that the US Justice Department was seeking "substantial" fines in the emissions case against the Italian carmaker. Euro zone businesses increased activity in 2018 at their fastest pace in over a decade as new orders surged, survey data showed.
While the data showed the region's economic growth was sustained, it was not unambiguously positive for equities, as it could add to upward pressure on bond yields. "Strong growth will provide little solace for equities or commodities if it pushes bond yields higher," Societe Generale analysts wrote.