Europe’s Stoxx 600 hits one-month low as inflation, rising yields pressure markets

European shares declined on Tuesday (Sep 1) as bond yields climbed and inflation data fueled expectations of a rate hike from the European Central Bank next week. The Stoxx 600, a broad-based index of European stocks, slipped 0.6% to a one-month low of 647.08. The FTSE 100 in Britain fell 0.3%, DAX in Germany dropped 1.1%, and CAC 40 in France declined 0.4%.

Euro zone government bond yields reached record highs amid a global bond selloff, as rising energy costs pushed inflation above 3% in August. Traders anticipate a 25-basis-point rate increase, according to LSEG data. Germany's 30-year bond yield hit a 15-year peak, while France's 30-year yield climbed to its highest level since 2008.

Experts suggest that retail investors should consider bonds for diversification, given the looming rate hikes and inflationary pressures worldwide. Chris Beauchamp, chief market analyst at IG, notes that after a prolonged focus on equities, bonds now offer a more compelling case for diversification. Hawkish remarks from Federal Reserve Chair Kevin Warsh and surging energy prices have prompted investors to price in additional interest rate hikes from major central banks.

Although Euro zone manufacturing activity expanded at its fastest pace in over four years in August, bolstered by strong new order growth and output growth, the Stoxx 600 has since lost around 2% of its value. Energy stocks gained 1.8%, with Brent crude surpassing $92 a barrel. Novartis rose 6.3% after its oral multiple sclerosis drug, remibrutinib, performed well in late-stage trials.

Reckitt Benckiser Group climbed 4.4% following a US jury ruling in favor of its Mead Johnson unit in a lawsuit claiming its Enfamil preterm baby formula caused serious bowel disease. Partners Group fell 7.3% after announcing its CEO's departure and warning of lower-than-expected performance income.