European shares close lower as banks drop to 3-month lows, oil prices weigh

European stocks declined on Thursday (Oct 8) as banking shares hit three-month lows and higher oil prices heightened inflation concerns. The Stoxx 600 index closed 0.75% lower, nearing a four-month low. Banks in Europe dropped 2%, with Deutsche Bank, Banco Santander, Societe Generale, and UniCredit all falling for a second day. Analysts pointed to the growing euro debt crisis worsening growth expectations and higher energy prices pushing inflation expectations upward, making it difficult for the ECB to provide relief.

France's CAC 40 fell 0.51% to a six-month low, as the country grapples with a budget deficit exceeding 5% of GDP. Euro zone bond yields surged, pushing borrowing premiums higher for heavily indebted countries like France and Italy. High oil prices, above US$100, made it challenging for developed bond markets to perform well, especially those with significant debt burdens.

Investors continued to sell debt issued by these countries, further driving up borrowing costs. Global bond sell-off, driven by expectations of additional central bank rate hikes and worries over government debt, pushed yields across euro area countries to multi-decade highs. Energy shares, due to rising oil prices, were the only bright spot among sectors that traded lower.

Despite differing views on the need for further rate hikes, ECB policymakers suggested inflation trends were not as alarming as initially feared. Among individual stocks, Argenx fell by 15.8%, its biggest one-day drop since December 2023, after discontinuing a Sjogren's disease trial due to low likelihood of meeting its primary goal.

Healthcare stocks experienced the largest percentage declines, with a 2.5% decrease. Tesco, a food retailer in London, rose 5.2% after raising its full-year profit outlook.