December 1, 2023

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European stocks log worst year since 2018 as rate hikes, Ukraine war rattle markets

A stock trader looks at his monitors at the stock exchange in Frankfurt, Germany.

Kai Pfaffenbach | Reuters

LONDON — European markets wrapped up their worst year since 2018 as Russia’s war in Ukraine, high inflation and tightening monetary policy hammered risk assets around the world.

The pan-European Stoxx 600 index closed the last trading day of 2022 down 1.3% — but it was lower by 12.76% since the turn of the year — its worst performance since a 13.24% annual decline in 2018. The European blue-chip index enjoyed a bumper 2021, jumping 22.25% on the year.

On Friday, the French CAC 40 closed down 1.5% and the German DAX was lower by 1.1% — with the two bourses logging annual losses of 9.5% and 12.5%, respectively.

The U.K.’s FTSE 100, which was open for a half day Friday, closed lower by 0.8% and clocked a yearly gain of 1.2%. The more domestic-focused FTSE 250 lost 19.5% in 2022, its biggest annual loss since 2008.

Economies around the world began the year still trying to emerge from the Covid-19 pandemic, with persistent lockdowns in China and other lingering supply bottlenecks forming what was now infamously mischaracterized by the U.S. Federal Reserve in 2021 as “transitory” inflationary pressure.

Russia’s unprovoked invasion of Ukraine in February, and subsequent weaponization of its food and energy exports in the face of sweeping sanctions by Western powers, sent food and energy prices skyrocketing and compounded this pressure, helping to send inflation to multi-decade highs across many major economies.

The cost-of-living crisis arising from soaring energy bills for businesses and consumers eventually began to weigh on activity, while the Fed and other major central banks were forced to tighten monetary policy with aggressive hikes to interest rates in order to rein in inflation.

However, these efforts to suppress demand weighed heavily on already faltering economies. The U.K. is projected to already be in what will be its longest recession on record, while a downturn in the euro zone is also seen as highly likely.

With the war in Ukraine showing no sign of abating and China in the process of reopening its economy as it ends three years of stringent Covid measures, investors are looking ahead with some trepidation to 2023.

“What happened this year was driven by the Fed. Quantitative tightening, higher interest rates, they were pushed by inflation, and anything that was liquidity driven sold off — if you were equities and bond investors, came into the year getting less than a percent on a ten-year treasury which makes no sense,” Patrick Armstrong, chief investment officer at Plurimi Wealth LLP, told CNBC’s “Squawk Box Europe” on Friday.

“Next year I think it’s not going to be the Fed determining the market, I think it’s going to be companies, fundamentals, companies that can grow earnings, defend their margins, probably move higher,” he said.

The Fed won't be what drives markets in 2023, wealth manager says

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—CNBC’s Ryan Browne and Natasha Turak contributed to this article.