Europe close: Bank stocks lead broad sell-off

(Sharecast News) - European stocks fell sharply on Friday as mounting concerns over the health of the US banking sector weighed on sentiment across global markets. The pan-European Stoxx 600 dropped 0.95% to 566.24, while Germany's DAX slid 1.82% to 23,830.99, France's CAC 40 eased 0.18% to 8,174.20, and London's FTSE 100 declined 0.86% to 9,354.57.

"London's leading index slumped to a two-week low on Friday, dragged down by significant losses in oil giants and major banks, as a global selloff in financial stocks intensified over concerns about the stability of US regional banks," said Patrick Munnelly, market strategy partner at TickMill.

"The banking sector took a heavy hit, tumbling nearly 3%."

The selloff followed disclosures by two US regional lenders of problems related to bad and fraudulent loans, raising fears that similar issues could emerge elsewhere in the sector.

Zions Bancorporation disclosed a $50m loss tied to two loans from its California branch, while Western Alliance revealed it had filed a lawsuit against Cantor Group V, alleging fraud.

"While everyone has been watching the tech sector for signs of a bubble, it's the banking sector that's the root cause of a minor market sell-off today," said Russ Mould, investment director at AJ Bell.

"US banking stocks were notably weak yesterday as investors worried about exposure to bad loans.

"That spread to Europe on Friday, with Barclays, Standard Chartered, NatWest and HSBC all dragging the FTSE 100 down."

The revelations reignited concerns about financial stability, reviving memories of the Silicon Valley Bank collapse in 2023.

Mould added: "Pockets of the US banking sector including regional banks have given the market cause for concern.

"Investors have started to question why there have been a plethora of issues in a short space of time and whether this points to poor risk management and loose lending standards.

"This includes Zions flagging an unexpected loss on two loans and Western Alliance alleging a borrower had committed fraud."

Mould said the pullback in UK-listed banks was largely sentiment-driven.

"Investors have been spooked and moved to trim positions in the sector, possibly opting to have lower exposure in case a crisis is brewing.

"There is no evidence of any issues with the London-listed core banking names, but investors often have a knee-jerk reaction when problems appear anywhere in the sector."

Inflation creeps above ECB target

In economic news, eurozone inflation edged above the European Central Bank's target in September, confirming a gradual pickup in price pressures across the bloc.

Final data released on Friday showed the headline consumer price index rising 2.2% year on year, matching the flash estimate and marking the first time in five months that inflation has exceeded the ECB's 2.0% goal.

Core inflation, which strips out volatile components such as energy, food, alcohol and tobacco, also inched higher to 2.4% from 2.3%, suggesting underlying price pressures remain persistent.

The moderation in energy price declines played a key role in the increase.

Energy prices were down just 0.4% year on year after a 2.0% fall in August, reflecting easing deflationary effects from lower wholesale costs.

Service-sector inflation quickened slightly to 3.2% from 3.1%, while price growth for food, alcohol and tobacco eased to 3.0% from 3.2%.

Non-energy industrial goods inflation was unchanged at 0.8%.

Banks, defence plays tumble as EssilorLuxottica takes off

In equity markets, banking stocks led declines across European markets on Friday as investors fled risk assets amid renewed concerns over US financial stability.

Shares in Deutsche Bank, Barclays, Banco de Sabadell, Banco Santander, Standard Chartered and Société Générale all fell, with the sell-off accompanied by a drop in global bond yields as investors sought safety in sovereign debt.

Sabadell suffered further pressure after its $19bn takeover proposal from BBVA collapsed, leaving the Spanish lender without a clear path to consolidation.

"The pullback in UK-listed banks will be sentiment-driven," said Mould.

"However, investors are watching one London-listed name in the broader financials sector very closely.

"ICG, formerly called Intermediate Capital Group, was the biggest faller on the FTSE 100 as it has exposure to private credit and asset-backed finance."

Defence stocks were also sharply lower after reports that US president Donald Trump was preparing to meet Ukrainian leader Volodymyr Zelenskyy to discuss potential peace talks with Russia.

The prospect of negotiations to end the conflict weighed on major defence names including Leonardo, Renk, Rheinmetall, Babcock and Hensoldt.

"Adding to the negative sentiment, the aerospace and defense sector fell 3.1%, mirroring losses in European counterparts," Munnelly said.

"The day's widespread declines underscored the fragile mood across global markets."

In contrast, EssilorLuxottica bucked the trend, surging after the Ray-Ban maker reported stronger-than-expected third-quarter revenue.

The company said sales of wearable products were "booming," supported by solid demand in North America, its largest market.

Reporting by Josh White for Sharecast.com.