STOXX 600 drops 1.8% to close at one-month low

Germany’s DAX and France’s CAC 40 shed 1.8% and 1.9%, respectively

European shares dropped on Tuesday, with those in Germany near a five-month low as a broad risk-off mood gripped markets, sparked by worries about an overvalued tech sector.

The pan-European STOXX 600 declined 1.8% to 561.62 points to close at a one-month low, registering its worst day since August. Regional bourses such as Germany’s DAX and France’s CAC 40 shed 1.8% and 1.9%, respectively.

Reflecting investor nervousness, a volatility gauge climbed 2.7 points to 22.89, its highest level since the U.S. regional bank sell-off in mid-October.

A higher volatility means higher anxiety throughout the market reflecting doubts regarding AI valuations, what the Fed might do next, and the uncertainty around the U.S. economic data and around the long-term borrowing costs, said Ipek Ozkardeskaya, senior market analyst at Swissquote Bank.

The higher the volatility, the higher the chances of a deeper market correction, Ozkardeskaya added.

Investor sentiment has been fragile, with expectations high for Nvidia to deliver standout results on Wednesday.

In Europe, shares in AI equipment makers declined. Siemens Energy shed 6.4% and Schneider Electric dropped 2.4%, while ABB’s shares slid 4.1% after the company reaffirmed its top-line growth forecasts, disappointing investors.

Nvidia, with its AI chips, has become the bellwether for the trend which has sparked gains in tech and infrastructure stocks. However, the worry is that the AI rally has made related sectors overvalued.

Losses were across the board, with European banking stocks down 2.9% and among the biggest drags on the STOXX index.

Auto stocks shed 2.9%, with Stellantis declining 4.4%. Miners dropped 2.6%, while tech stocks shed 1.8%.

Traders are also cautious ahead of the long-delayed U.S. jobs report due on Thursday.