European shares hit one-week low as Fed signals further tightening

European shares hit one-week lows on Thursday after the Federal Reserve hinted at continued interest rate hikes going forward, dampening hopes of a downshift in its aggressive fight against inflation.

The pan-European STOXX 600 (.STOXX) dropped 0.9%, logging its worst single-day performance in four weeks with rate-sensitive technology (.SX8P) and real-estate (.SX86P) stocks shedding 2.3% and 2.9%, respectively.

While most major sectoral indexes slid, banks (.SX7P) and insurers (.SXIP) held their ground, rising 0.4% and 0.2%.

The Fed delivered its fourth straight 75 basis-point rate hike on Wednesday and said the “ultimate level” of the benchmark policy rate could be higher than previously estimated. However, Fed Chair Jerome Powell flagged that future hikes may come in smaller increments.

“He (Powell) did seem to indicate that the pace of hikes will slow, but may hike more than the market’s anticipating over the course of next year,” said Patrick Armstrong, chief investment officer at Plurimi Wealth.

“And he doesn’t expect to do a U-turn when the economy does slow, so sticking with the hikes rather than reversing them is a little bit more hawkish than the market was expecting.”

European equity markets rose for three days out of four leading up to the Fed decision, helped by better-than-expected earnings. However, economic data since has provided further evidence that the euro zone was gradually slipping into a recession.

As euro zone inflation notches new record highs, the European Central Bank (ECB) has taken similar hawkish cues from its counterpart across the Atlantic in sticking to its rapid rate hiking cycle as its deposit rate is seen peaking at just below 2.9% in 2023.

On the other hand, the Bank of England warned that Britain faced a long recession and borrowing costs were likely to go up by less than expected, after raising interest rates by 75 bps – the most since 1989.

European travel & leisure stocks (.SXTP) slipped 1.6%, with Flutter Entertainment falling 5.5% after Australia’s financial crime watchdog ordered an audit of Sportsbet, the country’s largest online betting house operated by Flutter.

This also weighed down Irish stocks (.ISEQ) by 0.9%.

BMW (BMWG.DE) lost 4.7% as the German premium carmaker warned that rising inflation and interest rates would start to weigh on sales in coming months.

Soon-to-be-nationalised gas importer Uniper (UN01.DE) slumped 5.3% after a record 40 billion euro ($39.3 billion) net loss, while BNP Paribas (BNPP.PA), the euro zone’s biggest lender, added 3.1% as it posted a higher-than-expected net quarterly profit.