European equities held their ground on Tuesday even as a deepening selloff in government bonds pushed long-term yields to multi-year highs across the continent, with a favorable court ruling for Reckitt Benckiser and news of activist interest in Air Liquide providing pockets of strength.
The pan-European STOXX 600 edged up 0.04% to 651.35 points by 0729 GMT, as positive corporate developments offset pressure from rising borrowing costs. Britain’s FTSE 100 fell 0.4% as trading resumed after Monday’s bank holiday, while Germany’s DAX slipped 0.2% and France’s CAC 40 gained 0.4%.
The bond market remained the focal point of investor anxiety. Germany’s 30-year government bond yield climbed to a fresh 15-year high, and France’s 30-year yield touched its highest level since 2008. The rout extended across maturities: Germany’s 10-year yield reached 3.3123% during the session, its highest since May 2011, while France’s 10-year yield rose to 4.163%, a level not seen since November 2008.
Short-term yields also advanced. The German 2-year yield, which is particularly sensitive to monetary policy expectations, rose to 2.916%, and the French 2-year yield to 3.112%. The spread between French and German 10-year yields widened to 88.30 basis points, signaling that investors are increasingly demanding higher compensation for holding French debt amid chronic fiscal concerns and political uncertainty ahead of next year’s presidential election.
The selloff has been driven by a combination of factors. Renewed fighting in the Middle East has pushed oil prices higher, fueling inflation worries, while hawkish remarks from Federal Reserve Chair Kevin Warsh last week reinforced expectations that central banks may resume tightening. Brent crude traded around $92 a barrel, lifting energy stocks 1.4%.
Traders now largely expect the European Central Bank to raise rates in September, according to LSEG data. Market pricing suggests the deposit rate, currently at 2.25%, could climb to around 2.70% by year’s end, with a hike possible at the October 10 monetary policy meeting and another before the year closes. The ECB raised its policy rate in June for the first time in two years and nine months, citing a resurgence in inflation, and held rates last month while some committee members argued that additional hikes should be considered.
Euro zone inflation figures for August, due later in the day, could offer fresh clues on the interest rate trajectory. Bloomberg projected the eurozone consumer price inflation rate at 3.3% year over year for the month, the highest since September 2023. Germany’s preliminary August inflation rate came in at 2.9% year over year, according to the Federal Statistical Office, also the highest since the Iran war broke out in February.
The upward pressure on European bond yields is expected to intensify if the global rise in yields continues to spread across major economies. Expectations that fiscal spending will surge as the German government expands defense and infrastructure investment have also weighed on the government bond market.
Amid the broader market caution, individual corporate stories provided notable movers. Reckitt Benckiser Group added 5.2% after a jury favored the company in its trial over claims that it failed to warn that its products for premature babies could cause a deadly bowel disease. Shares of Air Liquide climbed 3.8% after media reports said activist investor Elliott Investment Management has built a stake in the French multinational company.