European stocks rebound to one-week highs as sanctions threat proves toothless

European equities surged higher on Tuesday, rebounding from recent multi-week lows as Washington's threatened sanctions against Tehran proved to be largely empty, providing relief to risk assets. The Stoxx Europe 600 Index climbed 0.4%, marking a turnaround from sluggish sessions and leading gains across continental bourses. Germany's DAX and France's CAC 40 both rose over 0.4%, while London's FTSE 100 increased by 0.1%.

This tactical rebound came after a week of heightened cross-asset volatility, as traders navigated surging energy costs, high long-end yields, and escalating Middle East tensions. On Monday, traders had been on edge, expecting severe disruptions following the Trump administration's announcement of an "economic D-Day" against Iran, which threatened secondary sanctions on foreign nations doing business with Tehran.

However, the formal announcement turned out to be largely a non-event, reiterating existing policy rather than imposing unexpected blockades on global crude channels. Energy prices retreated from their multi-week highs following the lack of immediate supply shocks, easing fears of cost-push inflation in European industrial supply chains.

Meanwhile, detailed economic data showed Germany's GDP expanding at a faster pace than initially estimated - growing by 1.0% on an annual basis in the second quarter, surpassing expectations of 0.9% and accelerating from 0.7% in the previous quarter. The growth beat was driven by robust external demand, with German exports up 2.0% quarter-on-quarter, fueled by strong shipments of chemicals, electronics, and transport equipment.

This positive economic news provided a fundamental tailwind for continental shares, reassuring equity desks that northern Europe is maintaining baseline economic momentum despite higher borrowing costs and subdued domestic consumer demand. The cooling global sovereign debt yields following new financing signals out of Washington further buoyed equity valuations.

U.S. Treasury yields eased back from recent peaks after reports indicated the U.S. Treasury Department might tap into its Treasury General Account (TGA) cash balance to fund its expanded debt buyback program, reducing the net supply of debt the market needed to absorb. Among individual stocks, Chesnara rose nearly 5% after reporting strong capital generation, and Vistry climbed 10% following the announcement of a 350 million pound social and affordable homes program.