TLDR
- European stocks hovered near two-week lows after their worst single-day drop in nearly a month
- Germany’s 10-year Bund yield hit its highest level since May 2011 at 3.22%
- Brent crude futures hovered near three-week highs around $91.50 a barrel
- Markets now fully price in a 25-basis-point ECB rate hike at the September meeting
- Traders are watching ECB President Lagarde’s comments and Fed July minutes for direction
European equities struggled to find a clear direction on Wednesday, hovering near the flatline after a sharp selloff the day before. The pan-European Stoxx Europe 600 Index sat near two-week lows, still recovering from its worst single-day drop in nearly a month.
Germany’s DAX fell 0.2%, while France’s CAC 40 edged 0.2% higher. London’s FTSE 100 and Spain’s IBEX 35 were both flat. Euro Stoxx 50 and Stoxx 600 futures were also down around 0.2% in premarket trading.
Tuesday’s selloff was driven by a mix of factors. Escalating threats in the Persian Gulf, rising crude oil prices, and soaring bond yields forced traders to quickly unwind risk positions.
Bond Yields Hit Multi-Decade Highs
Germany’s 10-year Bund yield jumped to 3.22%, its highest level since May 2011. The U.S. 30-year Treasury yield also surged past 5.30%.
Higher yields hurt stocks in two key ways. First, they reduce the present value of future company earnings, hitting tech and growth stocks hardest. Second, they make government bonds more attractive than equities, pulling money out of stock markets.
Renewed selling in chipmakers linked to the AI trade also added pressure to European markets on Wednesday.
ECB Rate Hike Bets Grow
ECB Chief Economist Philip Lane warned on Tuesday that Eurozone inflation, currently around 3%, remains “well above” the central bank’s 2% target. He said price pressures, while down from double-digit peaks, are still too high for policymakers to ease up.
Brent crude futures hovered near three-week highs around $91.50 a barrel. Shipping disruptions through the Strait of Hormuz, caused by military activity in the Persian Gulf, are keeping oil prices elevated.
The combination of sticky inflation and high energy costs has forced markets to reprice their rate expectations. Futures contracts now almost fully price in a 25-basis-point rate hike from the European Central Bank at its September meeting. That marks a sharp shift from earlier expectations of a prolonged pause.
Investors are watching closely for remarks from ECB President Christine Lagarde for clues on how the bank plans to handle a potential stagflationary environment.
Across the Atlantic, the Federal Reserve is set to release minutes from its July FOMC meeting. Traders will look for signs of how closely Fed officials were monitoring the labor market before the recent rise in long-term borrowing costs.
No major earnings are scheduled in Europe on Wednesday. The focus remains on UK and Eurozone inflation data, central bank commentary, and oil market developments.
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