European shares hit seven-week lows as rate hike fears grow

(Reuters) - The main European stocks index skidded to its lowest in seven weeks in a rough start to September on deepening worries about aggressive rate hikes and record-high inflation in the region. The pan-European STOXX 600 shed 1.4% in early deals as all sectors traded lower, with the index headed lower for a fifth straight day. Rate-sensitive tech stocks were the biggest decliners with a 1.8% fall. Banks, which tend to benefit from higher interest rates, were also down but by the smallest margin among the main sectors. Euro zone manufacturing activity shrank for a second month in August, according to a survey that showed weak demand meant factories were unable to sell as much as they made and built up stocks of finished goods at a record pace. That followed data on Wednesday showing regional inflation had risen to another record high last month, ahead of an upcoming European Central Bank policy meeting next week. "The economic situation in the euro area continues to deteriorate going into the meeting, with clear signs that growth is slowing due to the spike in energy prices resulting from the Ukraine conflict," Morgan Stanley strategists wrote in a note. Money markets priced in a roughly 80% chance for a 75 basis point ECB rate hike in September following the Wednesday data, up from a just over a 50% chance earlier. "Given policymakers' modus operandi on either side of the Atlantic clearly favours erring on the side of hawkish ... even at the expense of recession, it seems hard to envision the ECB opting not to deliver such an outsized move," said RaboBank strategists Richard McGuire and Lyn Graham-Taylor. Adding to the gloom, one of China's biggest cities, Chengdu, announced a lockdown as it launched four days of citywide COVID-19 testing. China-exposed miners plunged 3.3% to lead European losses as metals prices tumbled, while luxury stocks also came under pressure. Loius-Vuitton owner LVMH, Kering and Hermes were down between 2.2% and 2.3%. Among other stocks, Germany's Lufthansa fell 2.7% after a pilots' trade union announced a strike set to begin Friday as the two parties failed to reach an agreement on wages. Reckitt Benckiser fell 4.2% after announcing that Chief Executive Laxman Narasimhan will step down at the end of September after three years in the role. In a rare bright spot, German retail sales rose unexpectedly in July, up 1.9% on the month as online retail and the food sector showed recovery, data showed. Analysts had predicted sales would stagnate.

(Reporting by Anisha Sircar in Bengaluru; Editing by Saumyadeb Chakrabarty)

By Anisha Sircar