European Bond Yields Rise and Stocks Fall as Rate Hike Looms

Bridgette Randall
29 Aug, 2022
Frankfurt

European markets extended Friday's losses and the worries of faster and larger rate hikes in the euro zone. 

Bond yields in the eurozone rose after leading European policymakers said immediate rate hikes are necessary to cool inflation even at the risk of tipping the economy into a recession. 

Isabel Schnabel, a German economist and a member of the European Central Bank, stressed in a comment directed to other members to signal their determination to bring inflation back to target quickly. 

Olli Rehn, another member of the governing council, said that the central bank should act now because "high inflation is spreading in the economy" and "time to act is now and manage the inflation expectations and keep it anchored to target rate." 

The ECB governing council member Francois Villeroy and policymaker Martins Kazaks also hinted at aggressive policy tightening at the next rate decision meeting. 

The European Central Bank is scheduled to meet on September 8 and economists are anticipating a rate increase of either 50 or 75 basis points. 

The yield on the German government 10-year bunds rose to 1.506% and the yield on 2-year U.K. government bonds edged lower to 2.797%. 

The yield on 10-year Italian government bonds yield rose to 3.8% and on French bonds of similar maturities edged up to 2.12%.  

The DAX index decreased 0.6% to 12,892.22, the CAC-40 index dropped 0.8% to 6,222.28, and the FTSE 100 index eased 0.7% to 7,427.31. 

The euro held firm in parity with the U.S. dollar and the British pound edged lower to $1.17, only 4 cents shy of its record low in nearly four decades, as the inflation continues to accelerate in the island nation. 

The British pound is expected to decline more on the rising energy subsidies to households and dent bigger hole in the government finances. 

In stock trading, benchmark indexes opened lower and continued to slide more after the weak trading in Jew York. 

Popular indexes trimmed losses near the end of the session but closed down for the day. 

Tech stocks led the decliners with STMicroelectronics and Infineon Technologies dropped between 3% and 4%. 

Moderna Inc edged lower 1% to 137.44 euros and  Swiss regulators approved the company's latest vaccine that targets the omicron variant.

Valneva SE declined 0.4% to 9.22 euros and the French drug maker reported positive late stage trial results for its Covid-19 vaccine with booster effects. 

The Swiss Market index fell 1.1%or 121.72 points 10,942.16 and financials were among the leading decliners. 

Credit Suisse, UBS, Givaudan, Alcon, and Richemont fell between 2% and 4%.