European stocks dip as bond yields hit multi-year highs

European equities opened September on a subdued note on Tuesday as surging energy prices and a renewed bond selloff dampened investor sentiment, even as the region's manufacturing sector showed resilience.

Bond Yields Hit Multi-Year Highs

The pan-European STOXX 600 slipped 0.2% to a more-than-one-week low in early trading, with Britain's FTSE 100 falling 0.5% as it resumed after Monday's bank holiday and Germany's DAX also dropping 0.5%. France's CAC 40 bucked the trend with a modest 0.2% gain.kitco+1

Global bond yields surged to fresh highs as renewed hostilities between the United States and Iran lifted oil prices and stoked inflation concerns. Germany's 30-year government bond yield rose to a 15-year high, while France's 30-year yield touched its highest level since 2008, according to Reuters. European natural gas prices have also jumped after what Reuters described as "the first exchange of direct attacks between the United States and Iran in a month," renewing fears of prolonged supply disruptions.reuters+2

The combination of rising energy costs and hawkish remarks from Federal Reserve Chair Kevin Warsh last week has prompted traders to price in further monetary tightening. Markets now largely expect the European Central Bank to hike rates by 25 basis points as early as next week, according to LSEG data.kitco+1

"In our interpretation, this still falls into the 'insurance' hike classification, but further tightening from there — which is widely priced in by markets — would instead imply that the ECB sees restrictive policy as necessary, a much bolder move unless data shows a core inflation uptrend," ING analysts said in a note.devdiscourse+1

Energy Stocks Buck the Trend

Energy stocks were the session's standout performers, rising 1.4% as Brent crude traded around $92 a barrel. Equinor ↘ 1.29% shares climbed over 3% on the prior session, supported by elevated European gas benchmarks and a recently finalized 15-year gas supply contract with Uniper. Equinor's position as Europe's primary pipeline natural gas supplier has made it a direct beneficiary of the energy price spike.tradingkey+1

Elsewhere, Reckitt Benckiser jumped after a jury ruled in the company's favor in a trial over claims it failed to warn that its products for premature babies could cause a deadly bowel disease. Air Liquide gained 2.9% on reports that activist investor Elliott Investment Management had built a stake in the French industrial gas company.kitco+2

Manufacturing Strength Meets Inflation Anxiety

The selloff came despite encouraging economic data. Growth in the eurozone's manufacturing sector hit its fastest pace in more than four years in August, driven by the strongest rise in new orders since early 2022, an S&P Global survey showed. The STOXX 600 had reached a record high in early August on signs of economic resilience and strong corporate earnings, though the recent bond-driven selloff has since shaved roughly 2% off the index.devdiscourse+1

Eurozone inflation figures for August, expected later on Tuesday, could offer fresh clues on whether the ECB proceeds with a rate increase at its September meeting.reuters+1