European shares fall, record worst year since 2018

European shares slipped in the last trading day of a rough year marked by geopolitical tensions and fears of a recession as central banks hike rates, while London stocks outperformed their counterparts on the continent due to heavy commodity exposure.

The STOXX 600 (.STOXX) fell 1.3% in thin trading on Friday, as surging COVID-19 cases in China stoked concerns over global economic growth. The pan-European index fell 12.9% for the year, its worst performance since 2018.

China-exposed luxury firms such as LVMH (LVMH.PA) and Hermes International (HRMS.PA) declined 2.4% and 2.7%, respectively, reported Reuters.

Industrials (.SXNP) and banks (.SX7P) weighed on the index, while tech stocks (.SX8P) slid 1.8%, giving up some of the previous session’s sharp gains.

The rate-sensitive tech sector had rallied on Thursday, tracking gains in Wall Street peers as U.S. unemployment data signalled the Federal Reserve’s aggressive interest rate hikes might have started denting labour market strength.

Tech stocks are among the worst performers this year, down 28.4%, as major central banks raised interest rates.

The European Central Bank eased the pace of its interest rate increases earlier this month but stressed significant tightening remained ahead and laid out plans to drain cash from the financial system.

“This is the beginning of a new era, when central banks will be playing a more subdued role in the markets, with less liquidity available to fix problems – a more than necessary move that came perhaps too late, and too painfully,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Given that there is still plenty of cheap central bank liquidity waiting to be pulled back, the situation may not get better before it gets worse in the first quarters of next year.”