A historic surge in global bond yields is becoming a bigger problem for European stocks as investors confront stubborn inflation and mounting government debt. The Stoxx Europe 600 Index fell 1.1% this week, marking the fourth weekly decline in five as the 10-year Treasury yield rose to the highest in over two decades. Soaring fiscal deficits and geopolitical risks are raising borrowing costs in the region, with the UK’s 30-year bond yield hitting 6% for the first time in almost three decades.
Cracks are appearing as the prolonged Middle East conflict pushes up energy prices, with Brent crude surging 40% since a July low and European natural gas stockpiles running unusually low. Inflation in France, Germany and Spain is at the highest level in years, raising pressure on the European Central Bank to tighten policy further. The Stoxx 600 slumped 2.5% in September in its biggest monthly drop since March.
While the gauge has returned about 10% this year including dividends, trailing the S&P 500 Index, Bank of America Corp. strategist Sebastian Raedler expects the European benchmark to slump 10% by the second quarter next year. Investor confidence remains fragile as this year’s rally loses steam, with cheap valuations alone insufficient to drive a positive outlook amid stagflation risks. Technical indicators suggest the rally is faltering, with about 56% of the Stoxx 600’s constituents trading above their 200-day moving average.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing