European stocks set for worst week since November on hawkish Fed comments

By Elizabeth Howcroft

LONDON (Reuters) -European stocks slumped on Friday, with the STOXX 600 set for its biggest weekly loss since November, and Wall Street futures pointed to a mixed opening in the United States as investor expectations firmed for U.S. rate hikes to begin in March.

Asian shares fell after Fed Governor Lael Brainard became the latest and most senior U.S. central banker to indicate that the U.S. Federal Reserve will hike rates in March.

Other Fed officials have also shown their willingness to raise rates, after data this week showed U.S. consumer prices surged 7% year-on-year.

The risk-averse shift continued in European trading, with the STOXX 600 down 0.6% on the day at 1151 GMT, having lost 0.7% on the week overall.

France's CAC 40 and Germany's DAX were also down 0.6% while the UK's FTSE 100 was down just 0.1%. Technology stocks were on track for their second straight weekly decline, as investors switch from growth to value stocks.

The MSCI world equity index, which tracks shares in 50 countries, was down 0.3%.

Wall Street was set for a mixed open with S&P 500 futures a touch higher but Nasdaq futures down.

"It’s clearly the impact of monetary policy tightening that’s being felt in markets here," said Guillaume Paillat, multi-asset portfolio manager at Aviva (LON:AV) Investors.

"Why would I buy expensive low-profit growth stocks when the central bank is starting to tighten monetary policy?"

Paillat, who is expecting at least four Fed rate hikes this year, said it was "pretty much a done deal" that the tightening cycle would start in March.

"What matters over the coming days is going to be more about earnings," he added. "There’s still a bit of room for earnings to surprise to the upside."

The dollar was down for a fourth consecutive day, hitting a two-month low as investors took profit on long-dollar bets. At 1156 GMT the dollar index was at 94.827 and was on track for a 1% weekly drop - its biggest since May last year.

The euro was flat at $1.1454.

The yield on the U.S. 10-year Treasury rose to around 1.74%, but was still below the two-year highs it hit on Monday.

European government bond yields were up by around 1 to 2 basis points, having generally moved lower this week as investors sought safer assets.

The European bond market has been calm in the face of a possible government shake-up in Italy and ahead of French elections in April.

Meanwhile the five-year Japanese government bond yield jumped to its highest since January 2016 and the yen rose after a Reuters report that Bank of Japan policymakers are debating how soon they can start an eventual interest rate hike.

Such a move could come even before inflation hits the bank's 2% target, sources said.

The market reaction eased in European trading, with the dollar down around 0.2% against the yen, at 113.885 at 1159 GMT.

The British pound was up 0.1% against the dollar, at $1.372.

GDP data showed that Britain's economy grew faster than expected in November and its output finally surpassed its level before the country went into its first COVID-19 lockdown.

Oil futures were a touch higher, reversing recent losses, helped by the weaker U.S. dollar.

Bitcoin was little changed, around $42,000, having recovered somewhat since it slipped below $40,000 earlier this week. The cryptocurrency has lost around 38% of its value since it hit an all-time high of $69,000 in March.