By Josie Cox
European stocks plummeted Wednesday, pressured by a sharp rally
in the euro against the dollar after U.S. economic growth figures
dramatically undershot expectations.
In the early afternoon, having already ended the previous
session 1.5% lower on weak corporate earnings, the Stoxx Europe 600
was down 1.6%. On Wall Street, the S&P 500 declined 0.5% after
data showed that the U.S. economy slowed sharply at the start of
the year, as businesses slashed investment, exports tumbled and
consumers showed signs of caution.
That data weighed heavily on the dollar, sending the euro up
close to 1.7% to over $1.1160--a level last seen in early
March--and the British pound up more than 1% against the buck.
A weaker currency tends to bolster shares in companies that are
particularly dependent on exports--like automobile companies and
industrials--and Wednesday's move therefore particularly burdened
Germany's DAX, packed full of exporters.
Having earlier this year hit an all-time high and having scored
gains in excess of 17% in 2015, the DAX tumbled over 3% on the day,
putting it on track for its worst session in over a year in point
and percentage terms. France's CAC 40 and London's FTSE 100 fell
2.3% and 1.1%, respectively.
Investors said that the data, and the impact that the subsequent
currency move was having, were also starting to cause them to
question valuations.
"The GDP figure is hugely disappointing and it isn't surprising
that we're seeing a real sea of red across equity screens
globally," said Philip Lawlor, a partner at London-based Smith
& Williamson Investment, which has around GBP15.5 billion of
funds under management.
"Equities in Europe are starting to hit the upper band of
valuation parameters and investors are starting to look for reasons
to take profit, " he said, adding that the weak U.S. data figures
are being seen as a reason to sell.
The European Central Bank's massive stimulus program has for
months been spurring stocks, as the euro has edged closer to parity
with the dollar, but in recent days some investors have already
started to change their tune and turn more cautious.
"The argument that European equities look cheap on a relative
basis [...] can no longer be made," Michael Barakos, chief
investment officer for European equities at J.P. Morgan Asset
Management, wrote in a recent note.
"We'll need to see earnings growth materialize in order to move
sustainably higher," he added.
So far this season, however, earning have looked mixed.
On Wednesday, shares in British American Tobacco PLC, Finnish
stainless steelmaker Outokumpu Oyj and Belgian food retailer
Delhaize Group were some of the hardest hit by lackluster quarterly
figures, while Barclays PLC shares also slipped into the red.
The British bank said it had taken a new GBP800 million ($1.2
billion) charge in the first quarter for potential fines over its
foreign-exchange activities, dragging its net profit for the period
down to GBP465 million from GBP965 million in the same period last
year.
In debt markets Wednesday, government bonds across much of
Europe, and especially Germany, sold off sharply, though investors
were quick to call the move a blip rather than a sustained reversal
in the recent rally triggered by ECB quantitative easing.
Yields on German 10-year government debt, which rise as bond
prices fall, pushed to 0.25% for the first time in around a month,
while yields also rose on government debt in France, Austria and
Switzerland, as well as in the Nordics and southern Europe.
Later in the session investors will look to the Federal Open
Market Committee's policy statement, released at the conclusion of
its two-day meeting, which could shed more light on when the
central bank might raise rates. Most market participants, however,
don't anticipate major policy changes--especially after the GDP
print.
"The disappointing [data] has solidified universal expectations
in the market that the FOMC is unlikely to announce any changes to
its ultra-accommodative policy stance or its "not impatient"
forward guidance this month," said Lena Komileva, an economist at
G+ economics.
Write to Josie Cox at josie.cox@wsj.com
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