February 2, 2018 / 8:38 AM / 4 months ago

Worst week in more than a year for European stocks as risk appetite dries up

MILAN/LONDON (Reuters) - European shares suffered their biggest weekly loss in more than a year on Friday as investors’ appetite for risk dried up and disappointing results from Deutsche Bank dragged the heavyweight banking sector down.

The German share price index, DAX board, is seen at the stock exchange in Frankfurt, Germany, February 1, 2018. REUTERS/Staff/Remote

A more than five percent drop in shares of the German lender and losses across all sectors dragged the pan-European STOXX 600 index down 1.4 percent, suffering its fifth straight session of declines.

It was down 3.1 percent on the week, its worst weekly loss since November 2016.

Germany's DAX .GDAXI was the worst-hit, tumbling 1.7 percent on Friday to seal its biggest weekly fall in two years.

European stocks have been pushed lower by rising bond yields on expectations of tighter monetary policy, partly erasing January’s gains when investors piled into stocks on optimism over global growth.

“The stock market cannot always go up and multiples are very high. The least bit of dust can gum up the works. European equities are weighed down by extreme strength in the euro as the market prices in future changes to monetary policy,” said Marco Vailati, head of research at Italy’s Cassa Lombarda.

Vailati said European shares were more vulnerable than their U.S. peers to a possible pull back because earnings growth expectations were stable, whereas those for U.S. companies were being revised upwards thanks to measures there to cut taxes.

Bank of America Merrill-Lynch strategists said record equity inflows year-to-date had pushed their Bull & Bear indicator up to a ‘sell’ signal, predicting a downturn ahead for stocks.

On Friday the banking sector .SX7P, which benefited at the start of the year from a rotation into cyclical stocks, tumbled 1.1 percent. The index had its worst week in six months.

    Deutsche Bank (DBKGn.DE) shares dropped 6.2 percent, having hit its lowest level since November earlier in the session.

    It posted its third consecutive annual loss in 2017, taking a hit from challenging markets, a drop in investment bank revenue and a U.S. tax reform, after a difficult fourth quarter.

    “Consensus is yet to fully reflect the earlier profit warning, let alone today’s additional revenue miss and the disappointing cost guidance,” said Citi analysts, adding they expect consensus earnings forecasts to reduce materially.

    Bank stocks were also weighed by declines of around three percent in Spanish banks Caixabank (CABK.MC) and Sabadell (SABE.MC) following their quarterly updates.

    “Both CaixaBank and Sabadell results look a little disappointing. Fourth-quarter numbers decidedly mixed for both, but the guidance towards a brighter outlook may offer partial support,” said Jefferies analysts.

    Outside the financials sector, industrials stocks were the biggest weight on the STOXXE, with Airbus (AIR.PA) falling 3.5 percent after a downgrade from Credit Suisse.

    Mining and materials stocks .SXPP sank 2.7 percent, accelerating losses after the U.S. open.

    Nokian Tyres (NRE1V.HE) was the biggest faller after results, down 7 percent following weak Russian sales figures.

    Reporting by Danilo Masoni and Helen Reid,; additional reporting by Hakan Ersen in Frankfurt; editing by Andrew Roche, William Maclean

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