European stocks close at three-month lows as surging bond yields hammer banks
The Stoxx 600 hit its lowest level in more than three months
European stocks opened the final quarter of the year on a negative note on Thursday (Oct 1), with major banks experiencing significant declines as global government bond yields hit multi-year highs. The Stoxx 600, a pan-European index, closed 1.3% lower at 626.65, marking its biggest one-day drop in three weeks. It reached its lowest level in over three months.
Most European sub-sectors experienced drops. Banks saw their sharpest daily fall since March 3, with shares falling 3.7%. UK banks HSBC and Barclays each fell 4.1%, while Lloyds declined 4.5% as concerns about Britain's finances ahead of the month's budget increased. Global bond yields have surged in recent weeks due to investors selling government debt, while rising energy costs have heightened inflation worries, and the AI boom has bolstered the economic outlook, supporting the expectation of higher interest rates for longer periods.
This situation increases borrowing costs for companies and mortgage holders, while also raising governments' interest burdens. Germany's 10-year government bond yield declined slightly to 3.6526%, its highest level since June 2009. Meanwhile, France's 10-year government bond yield hit its highest level since 2002 ahead of the government's presentation of its 2027 budget bill, which included unpopular austerity measures.
France's CAC 40 fell 1.6%. Investment strategist Tim Armitage noted that the market is diagnosing a problem: despite rising inflation and bond yields, economic growth remains strong in key parts of the market. Investors are expecting further rate hikes, which negatively impacts both equities and fixed income. The outlook for equities remains closely tied to interest rates, with investors assessing whether higher borrowing costs and elevated energy prices will outweigh signs of resilience in the euro zone economy.
Inflation data showed a slight acceleration in Germany. Euro zone unemployment stood at 6.4% in August, in line with expectations from economists. Investors might feel uncomfortable with both bonds and equities struggling in recent days, but the economies are holding up well in the face of tighter monetary policy. Oil prices remained steady as recovering Gulf crude exports and a surprise rise in US inventories alleviated supply concerns.
Among individual stocks, Zealand Pharma fell 6.1% after trial results for Boehringer Ingelheim's obesity drug survodutide. Capgemini rose 7.3% to lead the Stoxx 600 following Accenture's upbeat annual revenue growth forecast. The tech index gained 0.5%.
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