Markets

European stocks close sharply lower, down 2.5% for the week on bond yield jitters

Key Points
  • The yield on the U.S. 10-year Treasury note briefly surpassed 1.6% on Thursday, its highest in over a year, fueled by expectations for higher economic growth and inflation.
  • Corporate earnings reports in Europe Friday came from British Airways parent IAG, LafargeHolcim, BASF, Deutsche Telekom, Suez and Engie.
  • For the week, the benchmark was down 2.5% but saw a climb of 2.2% for the whole of February.

LONDON — European stocks fell on Friday, after global markets were roiled by a sudden spike in bond yields that sent investors fleeing highly valued segments of the market.

The pan-European Stoxx 600 closed down by 1.7% provisionally, with basic resources shedding 4.3% to lead losses as almost all sectors and major bourses finished in negative territory.

For the week, the benchmark was down 2.5% but saw a climb of 2.2% for the whole of February.

On Wall Street, stocks swung wildly with tech names bouncing between losses and gains on Friday as traders struggled to shake off fears of rapidly rising rates.

The yield on the U.S. 10-year Treasury note briefly surpassed 1.6% on Thursday, its highest in over a year, fueled by expectations for higher economic growth and inflation on the back of Covid vaccine rollouts, the prospect of significant fiscal stimulus from Washington and pent-up consumer demand. The 10-year U.S. Treasury yield mellowed slightly on Friday, but remained above the 1.5% mark.

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"We perceive the recent moves in risk markets to be a bout of indigestion rather than a meaningful new change of direction for risk markets," said Karen Ward, chief EMEA market strategist at JPMorgan Asset Management.

"The equity and bond markets had become misaligned in the early weeks of this year with stock prices being buoyed by a fiscal-fueled recovery, yet government bonds taking little notice. Perhaps bond investors placed too much faith in the willingness of central banks to intervene and keep yields low. Now the bond market is catching up with what is essentially an improved economic outlook."

U.K. bond yields rose on Friday after Bank of England Chief Economist Andy Haldane warned that inflation may become difficult to tame, prompting more assertive policy action.

In Europe, corporate earnings reports came from British Airways parent IAG, LafargeHolcim, BASF, Deutsche Telekom, Suez and Engie.

IAG suffered a full-year operating loss of 7.4 billion euros ($9 billion), its largest in history, as the Covid-19 pandemic grounded aircraft around the world for a substantial portion of 2020. Shares climbed 3.1%.

"One could argue that the worst times could soon be over, particularly as people are starting to think about booking holidays again," said Russ Mould, investment director at stockbroking platform AJ Bell.

"IAG is naturally reluctant to issue any earnings guidance for the new financial year, but one can't help feeling there are grounds to be optimistic about it having significantly more planes in the sky in six to nine months' time."

In terms of individual share price movement, Belgian telecoms group Proximus slid 11.4% to the bottom of the Stoxx 600 after projecting lower core profit in 2021.

At the top of the European blue chip index, France's Teleperformance climbed 6.9% after JPMorgan raised its target price for the stock following a strong earnings report Thursday.

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