European shares fall again after brutal week for stock markets

Europe's main bourses fell again on Friday as worries about a sudden stop to central bank stimulus and rising tensions between Western powers and Moscow continued to drive world stocks to one of their worst ever starts to a year.

Strong earnings from Apple provided some encouragement for battered tech and U.S. markets, but traders were struggling to draw a line under a global selloff that has now firmly taken root.

The pan-European STOXX 600 fell nearly 1%, on course for its fourth straight weekly drop.

MSCI's main world index, which tracks 50 countries, is down over 8% for the month, while the dollar was on track for its best week in 7 months on bets U.S. interest rates could now go up as many as five times this year.

 

"With the Federal Reserve sounding a lot more hawkish, it has shaken the markets," said Jeremy Gatto, a multi-asset portfolio manager at Unigestion in Switzerland.

"Markets can live with rate hikes, but the main question remains around the balance sheet," he added. Markets have been driven up by all the stimulus pumped in during the COVID-19 crisis, "so if it starts reducing liquidity, that changes the game."

In its latest policy update on Wednesday, the Fed had indicated it was likely to raise rates in March, as widely expected, and reaffirmed plans to end its pandemic-era bond purchases that month before launching a significant reduction in its asset holdings.

The prospect of faster or larger U.S. interest rate hikes helped push the dollar to its best week in seven months. The dollar rose to 115.43 yen, closing in on its high this year of 116.34 on Jan. 4.

The euro meanwhile nursed losses with the single currency stuck near a 20-month low at $1.1133.

The yield on benchmark 10-year Treasury notes rose to 1.82% compared with its U.S. close of 1.80% on Thursday. The two-year yield, which is more sensitive to rate hike expectations, touched 1.19%.

European bond yields also rose further. Germany's 10-year yield, the benchmark for the euro zone, rose some 2 bps in early trade. It was up half a bp to -0.05% although still not quite able to break through the zero threshold.

Focus was also on Italy, where bond yields were back up around 4 bps after a late afternoon rally on Thursday while its parliament struggled to elect a new president.

OIL PRESSURE

Oil prices remained strong, set for their sixth weekly gain, amid concerns of tight supplies as major producers continue their policy of limited output increases amid rising fuel demand.

Brent crude futures climbed 57 cents, or 0.6%, to $89.91 a barrel, just shy of the $91.04 hit earlier in the week which was the highest level since October 2014.

A sixth week of gains will also mark the longest weekly winning streak for Brent since October last year, when Brent prices climbed for seven weeks while U.S. WTI gained for nine.

This year, prices have gained about 15% amid geopolitical tensions between Russia, the world's second-largest oil producer and a key natural gas provider to Europe, and the West over Ukraine as well as threats to the United Arab Emirates from Yemen's Houthi movement that have raised concerns about energy supply.

"Where Brent crosses $90 level, we see some selling from a sense of accomplishment, but investors start buying again when the prices fall a little as they remain cautious about possible supply disruptions due to rising geopolitical tensions," said Tatsufumi Okoshi, senior economist at Nomura Securities.

"The market expects supply will stay tight as the OPEC+ is seen to keep the existing policy of gradual increase in production," he said.

The market is focusing on a Feb. 2 meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, a group known as OPEC+. It is likely to stick with a planned rise in its oil output target for March, several sources in the group told Reuters.