FRANKFURT: European shares edged lower on Wednesday, pressured by elevated bond yields as escalating tensions in the Middle East stoked worries about energy-induced inflation.
The pan-European STOXX 600 closed down 0.2 percent at 645.94points, after hitting one-month lows earlier in the session. Retailers led a majority of sectors lower with a 2.3 percent drop.
Brent crude prices traded above USD95 a barrel, adding to inflation worries as the US and Iran traded more strikes overnight in the most serious escalation of the conflict between the two countries in weeks.
Europe is seen as especially vulnerable to the months-long conflict given its reliance on energy imports, but strong earnings during the latest reporting season were a relief to investors and cushioned some of the STOXX’s losses on signs that companies were coping better than expected.
“The backdrop is still relatively positive and that growth has been surprising to the upside, at least from a European perspective. So that gives us some support,” said Gordon Kerr, European macro strategist at KBRA.
“But concern about elevated prices is what’s driving uncertainty in the short term.”
Elevated government debt in regional economies, such as France, Italy and Britain, has been in focus as higher interest rates could add to fiscal burdens.
The yield on German 10-year bonds hit its highest level since April 2011. Investors see a nearly 100 percent chance the European Central Bank will increase interest rates by 25 basis points next week, while nearly a half-percentage-point rate hike is expected by the year-end, LSEG-compiled data showed.
Germany’s DAX shed 0.5 percent, while France’s CAC 40 dropped 0.3 percent after hitting a near two-month low earlier in the session. French stocks took a beating last week on fiscal concerns ahead of next year’s election.