European stocks drop as traders weigh Ukraine war and tighter monetary policy

European stocks dropped on Tuesday, following another day of sharp declines for Chinese equities, as investors weighed the potential economic implications of the war in Ukraine and the prospect of monetary policy tightening by the US Federal Reserve

Europe’s Stoxx 600 index fell 1.5 per cent in early dealings, more than reversing the prior day’s gains. Germany’s Dax lost 1.3 per cent and France’s Cac 40 index fell 1.4 per cent. In London, the FTSE 100 fell 1.4 per cent.

Russia’s invasion of Ukraine late last month had left Europe “flirting on the edge of recession”, said Peter Oppenheimer, chief global equity strategist at Goldman Sachs, who added that the fighting would stoke inflation and damp growth.

Across the Atlantic, US futures tracking Wall Street’s S&P 500 index and technology-heavy Nasdaq Composite, which is especially sensitive to interest rates, fell 0.4 per cent and 0.3 per cent respectively following declines in the previous session.

The moves come ahead of a two-day Fed meeting starting on Tuesday, when the US central bank is expected to increase interest rates by 0.25 percentage points, raising borrowing costs for the first time since slashing them to zero at the start of the coronavirus pandemic as it attempts to curb inflation that was running at a 40-year high even before Russia invaded Ukraine.

Yields on 10-year US Treasuries fell 0.05 percent points to 2.09 per cent on Tuesday, hovering just below their highest levels since 2019. The yield on Germany’s 10-year Bund, which serves as a barometer for eurozone borrowing costs, fell 0.05 percent points to 0.33 per cent, just below its highest level in more than three years.

Tighter monetary policy would hurt fixed income, stock prices, corporate earnings and valuations, said Mike Zigmont, head of trading and research at Harvest Volatility Management. “Throw in a side dish of Russian war and one can understand why investors are lacking enthusiasm at the moment,” he said.

In Asia, shares in China and Hong Kong fell for a second day as investors grappled with a worsening Covid-19 outbreak in the mainland and reports that Beijing had signaled its willingness to providing Russia with military assistance to support its invasion of Ukraine.

Hong Kong’s benchmark Hang Seng index dropped 5.7 per cent, while the Hang Seng China Enterprises index of large and liquid Chinese stocks shed 6.6 per cent. In China, the CSI 300 index of Shanghai and Shenzhen listed stocks fell 4.6 per cent.

The declines followed sharp falls the previous day, when Chinese stocks in Hong Kong fell the most since 2008 after authorities imposed lockdowns in multiple citiesincluding the technology and manufacturing hub of Shenzhen.

China reported more than 3,500 new cases on Monday, up from fewer than 1,400 a day earlier. The surge in cases has put pressure on Beijing’s capacity to maintain its strict approach of eradicating outbreaks through citywide lockdowns, testing and contact tracing.

Oil prices continued to drop as concerns over disruption to supplies from the Russian invasion of Ukraine eased. Brent crude, the international benchmark, fell 5.7 per cent to $ 100.85 a barrel.

Additional reporting by Tabby Kinder in Bangkok

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