European stocks sink into correction territory as Russia attacks Ukraine

© Reuters. FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 22, 2022. REUTERS/Staff

By Sruthi Shankar

(Reuters) -European stocks plunged nearly 3% on Thursday, with banks and automakers falling the most as Russia’s invasion of Ukraine raised fears that a war in Europe will fuel higher inflation and derail economic growth.

The pan-European STOXX 600 index tumbled 2.9%, marking a correction, or a 10% decline from its January record high. The benchmark was set for its worst selloff in a month.

The German DAX sank 3.6% to its lowest in nearly a year, leading declines among regional indexes on concerns over the country’s heavy reliance on energy supplies from Russia. A surge in oil prices helped limit losses on UK’s commodity-heavy FTSE 100. The index was down 2.5%. (L)

Russia launched an all-out invasion of Ukraine by land, air and sea on Thursday, the biggest attack by one state against another in Europe since World War Two and confirmation of the worst fears of the West.

The United States and its allies will impose “severe sanctions” on Russia, U.S. President Joe Biden said.

European banks most exposed to Russia, including Austria’s Raiffeisen Bank, UniCredit and Societe Generale (PA:SOGN), slumped between 6.7% and 14%, while the wider banking index fell 5.3%.

Automakers and travel & leisure were among the other top decliners, falling more than 4% each.

“There’s no denying that it puts pressure on supply chains and the likes of the German industrial complex for their energy needs,” said Keith Temperton, sales trader at Forte Securities.

“We haven’t seen such a confluence of factors like sky-rocketing commodity prices and potential stagflationary scenarios. It’s the worst possible recipe for stocks.”

A gauge of volatility in euro zone equities hit 39.39 points – its highest since October 2020.

Europe’s oil & gas index fell 2.2% even as oil prices surged about 6%, pushing Brent crude past $100 a barrel for the first time since 2014. The sector remains Europe’s top performer this year with a 6% gain. [O/R]

“Whether there will be a full-blown war or not, the simple strategy is to bet on a spike in inflation,” said Yuan Yuwei, partner, Water Wisdom Asset Management in Hangzhou.

“That means buying oil and agricultural products, and shorting consumer shares and U.S. growth stocks.”

In a sea of red, defence stocks were a bright spot, with UK’s BAE Systems (LON:BAES), Germany’s Rheinmetall and France’s Thales gaining between 2.2% and 3.6%.

Meanwhile, a European Central Bank policymaker Yannis Stournaras said the central bank should continue its bond-buying stimulus programme at least until the end of the year and keep it open-ended to cushion the fallout from any conflict in Ukraine.