October 4, 2018 / 7:40 AM / 2 months ago

European shares suffer biggest fall in a month after bond yield surge

MILAN (Reuters) - European shares suffered their biggest fall in a month on Thursday as global stock markets came under pressure from surging bond yields.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, September 24, 2018. REUTERS/Staff

The pan-European STOXX 600 benchmark index closed down 1.1 percent, while France's CAC 40 .FCHI fell 1.5 percent, Germany's DAX .GDAXI declined 0.4 percent and the UK's FTSE .FTSE retreated 1.2 percent.

Data on Wednesday showed that U.S. services sector activity raced to a 21-year high in September, lifting Treasury yields to their highest since mid 2011 on rising expectations for more U.S. rate hikes. That in turn boosted euro zone government bond yields on Thursday.

“The Treasury yield is commonly seen as the risk-free rate for investing, so an increase tends to be negative for other asset classes including shares,” said Russ Mould, investment director at AJ Bell.

A negative open on Wall Street where the S&P 500 .SPX and the Nasdaq .NDX were down 0.8 percent and 1.7 percent respectively by 1540 GMT contributed to dampen the mood in Europe.

Defensive companies were hit by the prospect of rising yields, which make their steady dividend streams less appealing.

Shares in European luxury goods companies were also among the worst performers due to persistent concerns over a slowdown in China.

France’s Kering (PRTP.PA) tumbled 5.4 percent, while rival LVMH (LVMH.PA) was down 4.9 percent and Britain’s Burberry (BRBY.L) slid 5.6 percent.

In contrast, financials tend to benefit from rising rates and bond yields as they help banks earn fatter margins on their traditional lending business.

German lenders Commerzbank (CBKG.DE) and Deutsche Bank (DBKGn.DE) rose 3.5 and 1.5 percent respectively, as German 10-year bond yields hit a 4-1/2 month high.

Italian banks .FTIT8300 rose 1.1 percent as investors monitored developments in Rome, where the government is trying to finalize budget details after clashing with the EU over its deficit targets.

Denmark’s Danske Bank (DANSKE.CO) dropped 4.6 percent after news it was being investigated by the U.S. Department of Justice over a 200 billion euro ($230 billion) money laundering scandal involving its Estonian branch.

“They are a perfect example of how regulators come down hard on banks who appear to have broken the rules,” said Markus Huber, trader at City of London Markets.

Among top movers on the STOXX was Danish maker of diagnostic devices Ambu (AMBUb.CO), which fell 14.7 percent after a strategy update.

Among few stocks making it through the day unscratched was British pharmaceutical firm BTG (BTG.L), which rose 5.1 percent after it upgraded its sales forecast.

Reporting by Danilo Masoni and Julien Ponthus; editing by Jan Harvey and Susan Fenton

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