European shares rebound after bond rout on easing Fed rate-hike bets

European shares experienced a rebound on Friday, following a bond-driven selloff, as softening oil prices and lower-than-anticipated US job data diminished hopes for a near-term rate hike from the Federal Reserve. The pan-European STOXX 600 ended the day 0.8% higher, after reaching its lowest point in over three months on Thursday.

US job growth was slower than expected in September, with prior two-month figures revised significantly downward, prompting traders to reduce bets on a US rate hike in October. Ronald Temple, managing director of Lazard Asset Management, noted that the weaker-than-expected jobs report likely excluded an October Fed rate hike. However, with two more months of inflation data pending before the December meeting, the Fed would be compelled to tighten policy once again.

Bond yields dropped, with the German 10-year bond, a key indicator for the euro zone, falling over 6 basis points to 3.454%. Oil prices also declined by $3 a barrel, further boosting risk appetite. Despite the gains, the STOXX 600 still saw a weekly decline. Most sectors closed in positive territory on Friday, with technology stocks leading the charge due to renewed AI enthusiasm.

Austrian Technology and Systemtechnik rose by 10%, followed by Infineon Technologies, now up about 9%, and Aixtron and Soitec, each adding 7.6%. European banking stocks fluctuated, but their weekly decline since April was the steepest since April. Meanwhile, Eurozone inflation unexpectedly rose more than anticipated in September, potentially rising further in the coming months.

The European Central Bank (ECB) hiked interest rates last month, and traders now estimate an 81.8% probability of a rate hike in December, according to LSEG data. Higher interest rates and elevated inflation are detrimental to equities, but the impact on equity markets depends on how long investors believe the problem will persist, according to Michael Field, chief equity strategist at Morningstar.

France unveiled its 2027 budget on Thursday, proposing unpopular austerity measures to reduce the deficit in advance of next year's presidential elections. France's 10-year borrowing costs peaked at the highest level since the 2008 global financial crisis. Among stocks, London's IG Group plummeted 22.6% to the bottom of the STOXX 600 after cutting its annual revenue forecast due to dwindling trading volatility.

This marked IG's most significant one-day drop since December 2016. Julius Baer gained 2% after announcing a share buyback program of up to 600 million Swiss francs ($724 million).