European stocks head for biggest loss since Brexit vote

European stocks headed for their biggest loss since the aftermath of Brexit amid investor concern that central banks may be less willing to continue supporting economic growth with loose monetary policy.

The Stoxx Europe 600 Index had lost 1.6 per cent to 340 at midday in London. All major western-European stock markets and industries dropped.

The VStoxx Index tracking euro-area equity volatility headed for its biggest jump since January, signalling a return of instability after an extended period of calm in financial markets.

Spain's IBEX 35 Index, Greece's ASE Index and Italy's FTSE MIB Index fell the most on Monday, losing at least 2.3 per cent. The rally that pushed the Stoxx 600 up as much as 14 per cent from a Brexit-induced low sputtered last week amid waning confidence that central banks will maintain or augment stimulus, following European Central Bank president Mario Draghi's downplaying of the need for additional support.

Federal Reserve Bank of Boston president Eric Rosengren also warned that the United States economy could overheat if policymakers waited too long to tighten.

US Federal Reserve meeting

“It was only a matter of time for this sell-off,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. “We had seen post-Brexit a really notable rebound in markets, even if fundamentals hadn’t improved accordingly. There’s also the risk of the Fed meeting coming up, because there is very little potential positive impact of the Fed postponing a rate hike, but on the other side, if there were a negative surprise, there could be some downside.”

Investors will look today to Fed governor Lael Brainard – seen as a leading opponent of rate increases – for further indications of the likely trajectory of interest rates in the world’s biggest economy before the September 20th-21st policy meeting. Any hawkish shift in her tone may spur volatility in financial markets, which put the odds of a hike in borrowing costs this month at 30 per cent.

Miners posted the worst performance of the 19 industry groups on the Stoxx 600 on Monday as commodity prices dropped. – (Bloomberg)