European stocks fell on Tuesday and bond yields jumped after a pickup in euro zone business activity this month fuelled predictions that the European Central Bank would remain hawkish as inflation stays stubbornly high.
Euro zone business activity gathered steam, expanding much faster than thought, according to a survey, buoyed by a growth in services even as the manufacturing sector shrank.
Germany’s 2-year bond yield, which is the most sensitive to interest rate expectations, hit a 14-year high of 2.95%. It was last up 3 basis points at 2.923%.
The Euro STOXX 600 fell as much as 1% before clawing back some of its losses and was last down 0.4%. German and French shares also lost about 0.3% respectively.
Also weighing on Europe’s benchmark index was Europe’s biggest bank HSBC Holdings Plc (LON:HSBA), which fell 1% on a cautious outlook even as its quarterly profit surged.
“The combination of better-than-expected economic activity at the start of the year and service sector inflationary pressures which remain elevated will likely keep the ECB in hawkish mode,” analysts at ING wrote in a note.
The data failed to budge the euro, which remained 0.2% lower at $1.067, on course to end February lower and break four straight months of gains. It has lost nearly 2% against the U.S. dollar so far in February.
The British pound, meanwhile, gained 0.4% against the dollar to $1.2088 and firmed versus the euro after UK PMI data showed an unexpected bounce in British business activity, giving hope that the economy could sidestep a deep recession.
The PMI data, closely watched by investors for pointers towards the future shape of monetary policy, came at a key time for equity markets, whose strong start to the year after a bruising 2022 has stalled in February.
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