European stocks drops to two-week low on higher bond yields, Middle East uncertainty
Global bond yields hit multi-year highs on Tuesday
European equity markets experienced a sharp decline, reaching a two-week low on Tuesday (Aug 18), as investors faced rising bond yields and inflation concerns, coupled with heightened geopolitical tensions stemming from US President Donald Trump's refusal to engage in dialogue with Iran. The Stoxx 600 index, a prominent benchmark across Europe, closed 0.69% lower at 651.90 points, marking its worst performance in nearly a month.
The pan-European index faced its most significant daily drop in this period. Global bond yields surged to multi-year highs on Tuesday, triggered by a stalemate in the Middle East, growing inflation worries, and concerns over the fiscal health of governments. Germany's 10-year Bund yield increased to 3.2610%, its highest level since April 2011.
Analysts at BNY noted that the sell-off resulted from a combination of factors, including rising real yields, term premia, increased government borrowing costs, and deteriorating investor sentiment towards future profits. The technology sector, in particular, suffered heavily, with chipmakers Infineon and Aixtron plummeting by 7.6% and 8.8%, respectively.
The energy sector, on the other hand, showed resilience, gaining 0.4% as oil prices surged to a three-week high, driven by Iran's more confrontational approach and Trump's denial of potential talks with Tehran. Europe's reliance on energy imports for its energy needs further compounded the economic uncertainty. Experts at KBRA emphasized that the current state of gas storage inventories and prices remains a critical point of uncertainty ahead of the winter months.
Additionally, markets are eagerly anticipating insights from the Federal Reserve's July meeting minutes to gauge the central bank's future monetary policy stance. Amidst the market turbulence, German investor sentiment improved beyond expectations, reaching 34.2 points in August, according to the ZEW economic research institute.
Notably, optical connectivity products manufacturer Huber+Suhner saw its shares drop by 11.4% due to weaker-than-anticipated core profits and communications unit orders, potentially marking its worst day since March 2019. H&M, a renowned fashion retailer, led the market gains, jumping 4.1% after an executive disclosed the acquisition of 8,000 shares in the company.
Coloplast, a medical equipment provider, also performed well, advancing 3% after announcing that its Kerecis wound-care business is expected to return to growth from January 2027. The broader healthcare sector experienced gains, rising 1.2%.
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