Europe: Shares suffer biggest fall in a month after bond yield surge

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

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

Data on Wednesday showed that US 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 US 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 and the Nasdaq were down 0.8 per cent and 1.7 per cent 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 tumbled 5.4 per cent, while rival LVMH was down 4.9 per cent and Britain's Burberry slid 5.6 per cent.

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 and Deutsche Bank rose 3.5 and 1.5 per cent respectively, as German 10-year bond yields hit a 4-1/2 month high.

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

Denmark's Danske Bank dropped 4.6 per cent after news it was being investigated by the US Department of Justice over a 200 billion euro (S$318 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, which fell 14.7 per cent after a strategy update.

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

REUTERS