December 20, 2018 / 8:43 AM / a month ago

Disappointing Fed drags European shares back to 2016 levels

FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, October 17, 2018. REUTERS/Staff

MILAN (Reuters) - A disappointing rate outlook from the Federal Reserve dragged European shares down sharply on Thursday with several benchmark indexes hitting two-year lows on worries that tighter monetary conditions could further weigh on sluggish economic growth.

The pan-European STOXX 600 index fell 1.6 percent by 0815 GMT, while Britain's FTSE 100 .FTSE and France's CAC .FCHI indexes fell 1.5-1.7 percent, having all hit their lowest levels since December 2016.

After raising interest rates for the fourth time this year, the Fed signalled “some further gradual” rate hikes ahead, disappointing market expectations of a more dovish message from the world largest economy’s central bank.

“Concerns in the U.S. about the real estate sector and leveraged loans remain. It’s clear that interest rates cannot continue to rise for long without having important consequences for economic growth,” said Edoardo Fusco Femiano, market analyst at brokerage eToro.

The sell-off in Europe was broad-based with all sectors trading in the red but cyclical sectors such as miners and banks led the steep falls, down 2.7 and 1.9 percent respectively.

Defensive sectors such as pharma and utilities outperformed but nevertheless traded in negative territory.

Among individual movers, shares in aluminium company Norsk Hydro (NHY.OL) fell nearly 4 percent and was among the top fallers in Europe after the U.S. said it would lift sanctions against its competitor Rusal. The news depressed aluminium prices to 16-month lows.

Among other materials stocks, heavyweight miners Rio Tinto (RIO.L), BHP (BHPB.L) and Glencore (GLEN.L) all fell more than 3 percent. All but two stocks on the STOXX 600 were trading in negative territory.

(This story corrects an earlier version with “positive” in last paragraph to “negative”)

Reporting by Danilo Masoni, Editing by Helen Reid

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