The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 15, 2022.
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 15, 2022. Reuters / STAFF

European stocks dropped on Wednesday, weighed by disappointing earnings and investor jitters ahead of a policy decision by the U.S. Federal Reserve, which is expected to hike rates by the most since 2000 to tame inflation.

The pan-European STOXX 600 index dropped 1.1%, and most regional indexes were also in negative territory.

Retailers led sectoral losses in Europe, with Britain's online fashion retailer Boohoo plunging 12.4% after freight and logistics cost inflation led to a 28% fall in its annual core earnings.

Pandora slipped 2.1% after the Danish jewellery maker flagged increased uncertainty around its full-year earnings forecast.

Swedish builder Skanska plunged 9.8% after it posted a drop in profit and braced for potential project cancellations in its Eastern European markets as an indirect effect of the war in Ukraine.

Overall, investors appeared to be on edge ahead of the U.S. central bank's policy decision, due at 1800 GMT, when it is expected to raise interest rates by 50 basis points and announce the start of reductions to its $9 trillion balance sheet.

"The Fed's rate hike move might be broadly priced in, but markets are clearly nervous that an even more hawkish FOMC might prompt a surge in volatility that could push indices back below last week's lows," said Chris Beauchamp, chief market analyst at online trading platform IG.

"Risk assets are still struggling to string together more than about two positive days in a row, and it seems unlikely that (Fed Chair Jerome) Powell can offer much in the way of good news."

There have been heightened expectations of rate hikes from the European Central Bank, which has been removing stimulus at the slowest possible pace this year, but a surge in inflation is now putting pressure on policymakers. [GVD/EUR]

Traders will be looking for clues on how far and how fast it is prepared to go amid growing concerns that China's COVID-19 lockdowns, rapid inflation and the Ukraine conflict could dampen economic growth momentum globally.

Still, first-quarter earnings expectations have been rising in Europe, with analysts estimating 35.4% profit growth for STOXX 600 companies, as per Refinitiv IBES data, compared with a 27.1% growth forecast last week.

Norway's Equinor gained 3.1% as the company reported a record quarterly pretax profit after the Ukraine conflict triggered an energy supply crunch that sent natural gas prices soaring to all-time highs.

Oil and gas stocks climbed 0.4% in tandem with rising crude prices as the European Union, the world's largest trading bloc, spelled out plans to phase out imports of Russian oil. [O/R]