European shares sank in early deals on Monday, tracking falls in Asia and on course for their biggest drop in nearly three months as investors took bets on a possible near-term rate hike in the United States.
Stocks and bonds had sold off in Asia, with markets also questioning whether global central bank stimulus programmes were reaching the limits of their effectiveness.
Europe’s STOXX 600 was down 1.8 per cent in a broad-based sell-off as the growth-sensitive basic resources sector slumped 3.7 per cent, the worst performer. Bank stocks fell 2.6 per cent.
Three Federal Reserve officials were set to speak on Monday, with some investors speculating that they would lay the groundwork for a rate hike as early as next week.
“Market participants ...believe that a September hike is possible,” said Ana Thaker, market economist at PhillipCapital UK, saying that market volatility would have only a limited impact on the Fed’s decision.
“I think the Fed will take into account the market's move. However, I don't think they can afford to base their decision on it.”
Earlier this month the STOXX 600 hit its highest level since January, driven by a rally of more than 10 per cent from lows hit after Britain voted to leave the European Union.
But it fell for a third straight session on Monday, with the European Central Bank having disappointed markets with a less dovish outcome to its policy meeting on Thursday than had been expected.
“There is a sense that central banks are running out of ammunition, and running out of things they can do,” Thaker said.
Volatility, an indicator of investor nervousness, jumped to its highest level since early August, having been low for much of the summer.
The rise of quantitative and algorithmic trading, aided by persistently low volatility, has made market pullbacks swifter than they used to be, said JCI portfolio manager Alessandro Balsotti.
“The problem is always forecasting the right timing and this, instead, has become harder in the current financial universe, more and more driven by the search of a yield that is disconnected from fundamentals,” he said.
German-listed E.ON was the top faller, down 12.3 per cent after it spun off its Uniper division, while Linde dropped 8.1 per cent after its Praxair merger fell apart.
Associated British Food fell 6.7 per cent after its results, with traders citing weak trading for its flagship Primark business, despite the company lifting its outlook for the second time in two months.