European Shares Decline 1% Amid Rising Bond Yields

By Sruthi Shankar, Siddarth S, and Shristi Achar A

European shares experienced a significant decline on Tuesday, reaching six-month lows due to pressure from rate-sensitive utility and mining sectors. The rise in U.S. Treasury yields and the stronger dollar, driven by expectations of prolonged elevated interest rates in the United States, contributed to this downturn.

Recent robust economic reports and the passage of a U.S. funding bill that prevented a federal government shutdown strengthened the dollar to its highest level in 11 months and pushed Treasury yields to a 16-year peak.

The pan-European index fell by 1.1%, marking its lowest point since March 24, while major U.S. stock indexes also recorded losses.

"The sharp decline we observed starting midday is primarily linked to U.S. futures," said Steve Sosnick, chief strategist at Interactive Brokers. He noted that the sell-off began when U.S. bond traders entered the market and it subsequently impacted European equities.

Utilities led the declines, with their index plummeting 2.7% to an 11-month low, influenced by concerns over rising interest rates. Shares of offshore wind developer Orsted fell by 6.0%, reaching a five-year low, while Vestas Wind Systems dropped by 5.5%.

"The assumptions surrounding offshore wind power have been drastically altered due to higher interest rates and commodity prices. Many projects were initially based on the expectation of low interest rates and inexpensive industrial metals," stated Peter Garnry, head of equity strategy at Saxo Bank.

Mining companies also faced a decline, falling by 2.6% as commodity prices reached a four-month low against a resilient dollar.

Deutsche Bank has revised its economic growth forecast for the euro area to 0.4% for 2023, suggesting that a mild recession in the region during the second half of the year cannot be dismissed.

All European sector indexes closed in the red, with economy-sensitive bank stocks decreasing by 0.9%.

U.S. Federal Reserve officials, including Governor Michelle Bowman and Vice Chair for Supervision Michael Barr, emphasized on Monday that monetary policy would need to remain restrictive for an extended period to achieve the Fed’s inflation target of 2%.

In company news, shares of German online fashion retailer Zalando dropped by 5.3% following a downgrade in its forecast for adjusted earnings before interest and taxes by Deutsche Bank. Meanwhile, British luxury brand Burberry fell by 3.6% after receiving a downgrade from UBS.

Boohoo experienced a decline of 2.8% after declaring that a slower-than-expected recovery in sales volume could lead to minimal or no improvement in revenue for the entire year.