European shares pause after bruising week as Fed’s Waller tempers rate hike fears

European equities saw a brief respite on Friday, hovering near multi-week lows following a tumultuous week, as hints from key Federal Reserve officials provided some relief ahead of a crucial U.S. jobs report. The pan-European STOXX 600 index lingered close to its lowest point in over a month, on track for the steepest weekly percentage decline since early July due to a sharp global bond market rout, soaring energy costs, and persistent central bank rate concerns.

German stocks remained flat, while France's CAC 40 and London's FTSE 100 both dipped by 0.3% and 0.2%, respectively. The persistent decline in fixed income drove sovereign borrowing costs to multi-year highs. Germany's 10-year Bund yield hit a 2011 peak of 3.37%, and the policy-sensitive two-year Schatz yield edged closer to 2.98%. Heightened risk-free rates squeezed equity risk premia, impacting high-duration growth names in tech and real estate sectors.

The escalation in U.S.-Iranian tensions in the Strait of Hormuz resulted in a halt to commercial vessel transit, pushing crude oil prices to new heights. Brent crude hovered near six-week highs, poised for a 7% weekly increase. The surge in energy prices rekindled worries about cost-push inflation, complicating the disinflation outlook for European utilities and industrial exporters.

Market turmoil eased briefly after Federal Reserve Governor Christopher Waller's remarks during a Reuters NEXT event. Waller pointed to encouraging signs of disinflation in recent macroeconomic data, suggesting that if further reports confirm this cooling trend, he would advocate for maintaining interest rates unchanged at the central bank's September policy meeting.

His comments echoed dovish sentiments from New York Fed President John Williams, who emphasized a cautious, wait-and-see approach to monetary policy. Financial futures swiftly adjusted, reducing the probability of a 25-basis-point Fed rate hike this month from nearly 65% to 50%, effectively rendering the September decision as a matter of chance.

The dovish shift sparked an overnight rally in Asian markets and helped ease pressure on sovereign bond yields, which had reached generational peaks, providing some breathing room for European trading desks to stabilize.