European Stocks Drop as Bond Yields Spook Investors; Banks Lag
(Bloomberg) — European stocks declined as regional bond yields climbed, denting the appeal of equities and fueling concerns about the economic impact of higher borrowing costs.
The Stoxx Europe 600 dropped 0.5% by 12:56 p.m. in London to the lowest since June, led by losses in banking and consumer products stocks. The FTSE 100 Index retreated 1%, making it one of the worst-performing regional benchmarks, as the 30-year gilt yield climbed to 6% for the first time since 1998.
In individual stocks, Pandora A/S fell 3.2% after Chief Executive Officer Berta de Pablos-Barbier said she is seeing US demand stabilize at a low level as consumers grapple with inflation and high gas prices. Davide Campari-Milano NV advanced 1.8% after Bank of America Corp. raised it to buy from neutral.
Bank shares have been outperformers in Europe for six years but are coming under pressure as yields climb.
“Even financials have started to underperform, as higher yields have led to a widening in high-yield credit spreads, with banks most exposed if defaults among the weakest borrowers were to pick up,” said Wolf von Rotberg, equity strategist at Bank J Safra Sarasin.
Rising yields generally lessen the appeal for equities as bonds turn into a clearer alternative. The pan-European benchmark snapped its five-month winning streak in September as Middle East tensions kept oil prices elevated and global bond yields moved higher.
Inflation remains a key focus for investors after hotter-than-expected readings from France, Italy and Switzerland.
Investors were also watching French stocks as France’s government unveiled plans to sharply narrow the budget deficit. French bonds trimmed declines, with their spread over German peers narrowing from the widest levels since 2012 following a sale of long-dated debt.
Stephan Kemper, chief investment officer at BNP Paribas Wealth Management Germany, said the CAC 40’s weak performance this year, along with doubts about Germany’s growth outlook, is weighing on investor sentiment.
“The toxic mixture of pressing bond yields, political uncertainties and high budget deficits is not only hitting bonds but equities as well,” Kemper said.
Here’s what market strategists are saying:
There are signs of elevated stock exposure and leverage, posing a challenge to a year-end market rally, according to JPMorgan global strategists. European investors are shifting money from France toward the UK while global equity funds are heading into the fourth quarter with their strongest year-to-date inflows since 2021, according to HSBC strategists. –With assistance from Sagarika Jaisinghani, Ruhell Amin and Farah Elbahrawy.
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