STOXX 600 drops to two-week low on higher bond yields, Middle East uncertainty

On Tuesday, the Europe's benchmark STOXX 600 experienced its worst day in nearly a month, plummeting to a two-week low. This decline was primarily driven by higher bond yields and renewed concerns over inflation, compounded by U.S. President Donald Trump's denial of talks with Iran, which added to geopolitical uncertainty. The pan-European index closed 0.69% lower at 651.90 points, with Germany's 10-year Bund yield rising to a multi-year high of 3.2610%.

The selloff was not solely attributed to inflation expectations, as real yields and term premia were also on the rise due to increased government borrowing, weakened pension demand, and heightened price sensitivity among private investors. Tech stocks were hit the hardest, with Infineon and Aixtron falling by 7.6% and 8.8%, respectively.

In contrast, the energy sector saw a gain of 0.4% as oil prices hit a three-week high, fueled by Iran's more assertive stance and Trump's denial of talks with Tehran. The Middle East continues to cast a shadow over Europe's economic outlook, given the region's heavy reliance on imports to meet its energy needs. Current inventory levels and costs remain a key source of uncertainty as Europe prepares for winter.

Market participants are also keeping a close watch on the minutes from the Federal Reserve's July meeting, seeking clues about the central bank's future monetary policy direction. Individual stocks also played a role, with Huber+Suhner, an optical connectivity products maker, falling 11.4% following weaker-than-expected core profits and order concerns, marking its worst day since March 2019.

H&M, a fashion retailer, led sectoral gains, rising 4.1% after an executive disclosed the acquisition of 8,000 shares in the company. Coloplast, a medical equipment manufacturer, also advanced 3% after announcing that its Kerecis wound-care business would return to growth from January 2027.