European stocks are on track for their biggest one-day drop in two months as North Korea’s latest missile launch sapped investors’ risk appetite and a soaring euro intensified concerns about corporate profits.
The Stoxx Europe 600, a benchmark for the European market, was down 1.3 per cent at 415.18 in early afternoon trading on Tuesday, with Germany’s Dax index leading the declines. Asian stock markets closed lower.
European equities have lost momentum since touching a high for the year in early May. North Korea’s launch of a ballistic missile that flew over Japan early on Tuesday provoked strong condemnation from Japanese prime minister Shinzo Abe, offering investors a reminder of the tensions over the regime in Pyongyang.
A more consistent headwind for European stocks in recent weeks has been the rising euro, which on Tuesday topped the $1.20 mark for the first time since early 2015. Traders and investors betting on a stronger single currency had feared that Mario Draghi, the European Central Bank president, might seek to rein the euro in at a gathering of central bankers in Jackson Hole, Wyoming, over the weekend.
That he did not, alongside concern that Tropical Storm Harvey might prove a temporary drag on US economic growth, was enough to propel the euro higher and send the dollar lower against several currencies.
“Over the near term, it’s definitely where investors are focused,” said Nick Nelson, an equity strategist at UBS. “The speed of the move and the fact that this is a tentative start to the profit recovery in Europe gives investors cause for concern.”
The single currency has gained more than 14 per cent against the dollar this year, and also soared to an eight-year high against sterling last week.
“The concern, particularly from incoming international investors, who may actually hedge the currency, is whether the impact on earnings is going to drag down the European profit recovery,” said Mr Nelson.
While exporters are under pressure, companies with high levels of domestic exposure could benefit. European banking stocks — a play on domestic economic recovery — have outperformed the broader market significantly this year.
Although equities and the euro are currently moving in opposite directions, they were more closely correlated earlier this year, around the time of the French elections in April, when some investors believed the future of the currency was at risk.
However, others suggested that although the current moves are a worry, the euro has not yet reached a level at which it poses serious threat to the profitability of European companies.
“These moves are a concern in the shorter term, but we’re still not really at a level where we would be concerned about the competitiveness of companies more globally,” said Mark Richards, a multi-asset strategist at JPMorgan Asset Management.
He added that while markets typically focused on the relationship between the euro and the dollar, the cross with the Japanese yen was also important, given competition with Japanese companies.