European shares slumped 1.7% on Thursday following a sharp sell-off on Wall Street, as dismal results from big retailers underlined the hit from surging inflation on the world's biggest economy.
Tracking U.S. peers, regional retailers fell 2.4% and were the biggest drags on the pan-European STOXX 600 index , which extended declines after a 1% slide on Wednesday.
Losses were broad based, with all major sub-sectors trading in the red.
U.S. stock futures pointed to a fresh round of sell-off after Target Corp's quarterly profit halved and Walmart cut its profit view as they struggle with rising fuel and freight costs, while consumers shift their spending away from big-ticket purchases to essentials.
European retailers such as Tesco and Sainsbury had also warned last month of a hit to full-year profits from rising prices.
Nestle, Tesco, Diageo and Unilever fell between 2.7% and 4.5% on Thursday.
"The fact that earnings are being compressed for mid-to-lower tier consumers share just tells you inflation is having an impact...on Europe probably more so than the U.S. because wage expectations are not as good," said Sebastien Galy, senior macro strategist at Nordea Asset Management.
"It's reviving the stories of stagflation, particularly so in the eurozone."
Along with the ongoing stimulus reduction by the central banks and concerns about the fallout from the Ukraine war, investors fled to the safety of bonds.
The STOXX 600 is down about 12% for the year as China's COVID-19 worries added to global recession fears. But as cases drop, hopes of recovery have offered some respite to investors.
"Many of the indicators suggest that we're close to reaching the bottom. So the question is probably within the next two weeks, are we going to reach a plateau... because we haven't hit credit boundaries," Galy said.
Among other stocks, British home repair services firm HomeServe rallied 10.6% after Canada's Brookfield Asset Management said agreed to buy for 4.08 billion pounds ($5.04 billion).
France's Valneva surged 11.1% after the European Union's medicine regulator accepted the company's filing of marketing authorization application for its inactivated COVID-19 vaccine candidate.
London's Royal Mail fell 8.8% after the company's 2021-22 profit slightly missed market expectations.
First-quarter earnings for companies listed on STOXX 600 are expected to increase 41.5% from a year ago, as per Refinitiv data. As of Tuesday, 68.4% of results from companies have exceeded market expectations. In a typical quarter 52% beat profit estimates.
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