LONDON: Commodity and bank stocks dragged Europe’s STOXX 600 lower on Thursday as rising bets on more aggressive rate hikes by the Federal Reserve fed into recession fears, while Italy’s main index tumbled 3.4% as the country’s government faced collapse.

The pan-European STOXX 600 index ended 1.5% lower, adding to 1% fall on Wednesday when a hot US inflation spurred bets that the Fed could go for a bigger hike than the 75-basis-point move markets had priced in for this month.

Global equities have taken a hit this year as central banks attempt to tame surging inflation, leaving investors worried about the impact on economic growth. The STOXX 600 is down about 16% so far this year.

The European Commission cut its forecasts for economic growth in the euro zone for this year and next and revised up its estimates for inflation.

“There is a recessionary fear that continues to be on top of investor minds,” said Bert Colijn, senior economist, eurozone, at ING.

But he added that worries also stem from a bigger discrepancy between the European Central Bank and the Fed, with the former seen sticking to a 25-basis-point hike next week despite inflation at record highs.

Meanwhile, the euro plunging below parity to a 20-year low against the dollar also spells more trouble for euro zone inflation.

At the ECB meeting next week, investors will be watching for any comments on the euro’s drop and its tool to control widening euro zone bond spreads, as well as an inflation forecast and hints about the magnitude of future hikes.

Italy’s MIB index dropped 3.4% to close at its lowest since November 2020 after the 5-Star Movement, a coalition member, failed to support a parliamentary confidence vote including measures to offset Italy’s cost of living crisis Straight after the vote, Draghi headed to meet President Sergio Mattarella, the supreme arbiter in Italian politics. A national election is due by early 2023.

“Given the fact that there are only few months left before the natural end of the legislature, we think that President Mattarella will probably make an effort to guarantee a government for the country in a such critical geopolitical and economic environment,” UniCredit strategists wrote in a note.

Italian bond yields rose sharply, widening spreads with German counterparts.

In earnings, Shares in Samhallsbyggnadsbolaget I Norden (SBB) slumped 19.4% after reporting downbeat second- quarter results.

Oil and gas stocks and miners dipped 3.8% each tracking commodity prices, while banks slipped 3.1%. Travel and leisure were the sole gainers, up 0.5%.

Hugo Boss rose 2.4% after the German fashion house raised its 2022 outlook.