European shares slip as 10-year Treasury yield holds above 5% ahead of Fed

European equities fell on Tuesday as surging oil prices, rising bond yields, and fresh inflation data reinforced fears that central banks on both sides of the Atlantic will continue tightening monetary policy to combat energy-driven price pressures rooted in the Middle East conflict.

The pan-European STOXX 600 dropped 0.4% in early trading, dragged lower by a 1.3% decline in banking stocks. Most major regional bourses also traded in the red, with only healthcare and travel and leisure sectors bucking the trend.reuters

Bond Yields and Rate Expectations

The selloff came a day after the benchmark U.S. 10-year Treasury yield breached 5% for the first time since October 2023, a threshold that analysts say could ripple through the global economy by raising borrowing costs and dimming the appeal of equities. The yield remained above 5% on Tuesday.tradingeconomics+2

Markets are now focused on the Federal Reserve's two-day policy meeting that began on Tuesday, with an 85% majority of economists in a Reuters poll expecting a quarter-point rate hike to 3.75%-4.00% — which would be the first increase since July 2023. Prediction markets placed the odds of a 25-basis-point hike at roughly 86%.reuters+1

The European Central Bank already moved last week, raising its key deposit rate by 25 basis points to 2.5% on September 10, citing persistent inflation pressures from the Iran war. ECB President Christine Lagarde's updated forecasts project eurozone inflation averaging 3% in 2026 and not returning to the 2% target until late 2027.global.morningstar+2

Inflation Data Confirms the Trend

Fresh data on Tuesday showed French consumer prices rose 2.6% year-on-year in August on an EU-harmonised basis, according to statistics office INSEE, revised down from a preliminary reading of 2.7% but still accelerating from July's 2.4%. The reading marked France's highest harmonised inflation since May.reuters+1

Oil prices, which have climbed as renewed attacks on shipping and energy infrastructure in the Middle East reversed earlier relief, remain the primary driver. The U.S. Energy Information Administration raised its 2026 Brent crude forecast to roughly $91 a barrel earlier this month, a nearly 5% increase from its prior estimate.reuters

What Comes Next

With the Fed decision due Wednesday and markets pricing in further ECB hikes in October and December at roughly 75% probability, investors face an environment where central banks appear determined to respond to an inflation shock largely outside their control. Among individual stocks, Deutz ↗ 0.00% fell 4.5% after offering up to 10% of its shares in a capital increase.reuters+1