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As Traders Return, European Stocks Fall Due to Tightening Woes

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After a long Easter weekend slowdown, European shares slumped on Tuesday as gloomier global growth estimates, warnings of even more aggressive Federal Reserve rises, and new sources of strain on commodity supplies dampened risk appetite.

As of 8:01 a.m. in London, the Stoxx 600 Europe Index had fallen 0.7 percent. Automobiles and healthcare were among the worst performers, while energy stocks soared.

Investors are keeping a close eye on policymakers’ words as the potential of monetary tightening weighs on mood. President of the Federal Reserve Bank of St. Louis, James Bullard, said the central bank needs to act fast to raise interest rates to about 3.5 percent this year with several half-point hikes, and that rate increases of 75 basis points should not be ruled out.

“Part of what the Fed wants is tighter financial conditions, and we haven’t really seen a meaningful tightening of financial conditions, either in terms of equity valuations or frankly in terms of the broader credit market as well,” said David Riley, chief investment strategist at BlueBay Asset Management. “As a result, I believe we will see more volatility and increased downside risk from the broader risk asset complex.”

The key European equities benchmark is trying to find its footing as the conflict in Ukraine weighs on morale, while the region’s economy slows and inflation continues at record highs. The outcome of an uncomfortably close French presidential election this Sunday, as well as quarterly earnings reports due this month, will be the next triggers expected to provide market direction following a poor start to the year.

“We just reduced our earnings growth expectations for the United States, Europe, and Japan,” Anita Gupta, head of equity strategy at Emirates Nbd Bank, said on Bloomberg TV on Tuesday. “The market is sending us extremely mixed signals; it’s a highly volatile atmosphere.” (news source Bloomberg)

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