European markets trade lower after Fed’s Powell signals a rate hike next month

European stocks fell on Friday after Federal Reserve Chair Jerome Powell said a half-percentage point rate hike is “on the table” for next month.

The pan-European Stoxx 600 had dropped by 1.5% in early afternoon trading, with the retail sector marking the biggest losses.

Friday’s trading in Europe comes after a dramatic reversal in stock markets in the U.S. Thursday, with major averages closing lower and wiping out earlier gains.

The markets are … having to digest a much steeper, a much more accelerated rate path than they thought was the case a week ago, a month ago or three months ago.

Daniel Morris

Chief market strategist, BNP Paribas Asset Management

Earlier on Thursday, Federal Reserve Chair Jerome Powell commented on the possibility of a larger-than-usual rate hike next month, spooking markets. Speaking during an International Monetary Fund panel moderated by CNBC’s Sara Eisen, Powell said that taming inflation is “absolutely essential.”

“I would say 50 basis points will be on the table for the May meeting,” he added. 

U.S. Treasury yields also jumped on the back of Powell’s comments, while shares in Asia fell Friday.

“The markets are … having to digest a much steeper, a much more accelerated rate path than they thought was the case a week ago, a month ago or three months ago. So I think there still is that adjustment taking place,” Daniel Morris, chief market strategist at BNP Paribas Asset Management, told CNBC Friday.

“I think the key question for the direction of the markets is going to be: When does that process stop? When have we sufficiently, fully priced in where rates are going to be in a year. And I think once that happens, and hopefully that’s soon, then we’ll see a real stabilization in markets.”

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Stock moves

In the retail space, B&M sunk more than 5% on news that its CEO will retire next year. In addition, data out in the United Kingdom showed retail sales volumes dropping more than expected in the month of March.

“March’s substantial fall in retail sales volumes looks like the start of a period of weakness in consumers’ spending, rather than just a blip,” Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics said in a note Friday.

Shares of the French luxury retailer Kering also dropped more than 5% amid concerns over its sales performance in China, where a zero-Covid policy is worrying investors.

SAP released earnings Friday, flagging a hit to its revenue from its exit from Russia. The German software giant said its decision to leave Russia following its invasion of Ukraine was expected to lead to a negative revenue impact of around 300 million euros ($325 million).

Speaking to CNBC Friday, the company’s CEO Christian Klein told CNBC its cloud subscription revenues were “very sticky,” and said its transformation plan was ahead of schedule.

French election

French voters are heading to the polls Sunday. The second — and final — round of the election puts incumbent Emmanuel Macron up against anti-immigration party leader Marine Le Pen.

In a note Thursday, Goldman Sachs described the election as a decisive moment for France’s policy path. 

“If Mr. Macron is re-elected, we would expect him to revive his reformist agenda as a continuation of his pro-integration plan for Europe,” the analysts, led by Sven Jari Stehn, said.

“These reforms are to a large extent embedded in our current forecasts. Should M. Le Pen be elected, we would expect an institutional impasse owing to the likely lack of a parliamentary majority in next June’s legislative elections and significant friction with EU partners.”

— CNBC’s Yun Li contributed to this report.

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