European stocks suffer worst week in 2 months

European stocks recorded their worst week in two months on Friday, with tech stocks and retailers feeling the brunt of selling on the prospect of bigger interest rate hikes to rein in decades-high inflation.

The pan-European STOXX 600 index fell 1.91% to 429.91, down 4.55% from the previous week, retailers down 2% and tech stocks down 2.4% .

The retail trade index hit its lowest level in two years after a series of weak earnings reports that highlighted the fallout from soaring inflation, the war in Ukraine and a new series of blockages in China.

Adidas fell 3.6% on lowering sales expectations this year, with new COVID-19 lockdowns in China hitting the German sportswear company.

Tech stocks benefited from the decline in growth stocks on Wall Street, which were dragged lower by high yields in US Treasuries.

The data showed stronger-than-expected U.S. job growth, heightening fears of a bigger interest rate hike by the U.S. Federal Reserve.

The European Central Bank (ECB) is expected to raise interest rates later this year, with some analysts predicting a hike as early as July after recent record inflation readings in the euro zone.

“We agree with investors that the ECB should raise interest rates by 25 basis points [basis points] in July,” said Jack Allen-Reynolds, senior economist for Europe at Capital Economics.

The worst is yet to come for the eurozone economy, he said, adding: “Shortages are likely to continue to weigh on activity and rising inflation will eat away at real incomes further.”

Oil and gas stocks were among the few to gain in Europe, rising 0.5% as crude prices traded above $110 a barrel ahead of an impending EU embargo on Russian oil .

Meanwhile, the Bank of England (BOE) said on Thursday the UK risked the double whammy of a recession and double-digit inflation by raising interest rates to their highest high level since 2009, which has weighed on UK equities.

“The gloomy economic outlook will likely limit the BoE’s ability to tighten policy aggressively,” BCA Research analysts said in a note.

The blue-chip FTSE 100 closed down 1.54% at 7,387.94, posting a weekly decline of 2.08%.

However, the index has outperformed major stock markets so far this year as a surge in oil and metals prices, as well as a weak pound, boosted commodity giants and exporters.

“The FTSE 100 is exposed to all the sectors that are causing inflation problems, and that benefits the UK stock market,” said Caroline Simmons, UK investment director at UBS Global Wealth Management, who expects the index reaches 8,100 by the end of the year.

“It’s hurting the economy because of the pressure on consumers, but it’s benefiting the FTSE 100. Now, of course, the pound has weakened and that’s also helping,” she said.

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