European equities staged a broad rebound on Tuesday as euro zone government bond yields retreated from multi-decade highs, but UK markets remained under pressure from elevated gilt yields and rising expectations that the Bank of England may need to tighten policy further.
The pan-European STOXX 600 rose close to 1%, while Germany’s DAX added about 0.9% and France’s CAC 40 gained 0.7%. Spain’s IBEX 35 climbed 1.2% even as Prime Minister Pedro Sanchez called a snap election. Healthcare led sector gains, rising 1.4%. Danish biotech Genmab jumped more than 8% after late-stage data showed its epcoritamab combination with AbbVie reduced the risk of disease progression or death by 51% in newly diagnosed diffuse large B-cell lymphoma patients. Italy’s Recordati also rose after CVC raised its takeover bid to 53 euros per share, while Technoprobe advanced after J.P. Morgan initiated coverage with an overweight rating.
In bond markets, euro zone yields eased after a sharp run-up driven by French fiscal worries. The spread between French and German 10-year yields narrowed from last week’s peak. Traders scaled back expectations for further European Central Bank tightening, pricing about an 80% chance of one more hike by year-end, down from expectations of several hikes earlier. ECB Chief Economist Philip Lane said high energy prices had not yet produced strong follow-on inflation effects.
However, UK government bond yields remained elevated. The 10-year gilt yield reached 5.45%, up from a year-to-date low of 4.235%, while five-year and two-year yields rose to 5% and 4.858% respectively. UK public debt has climbed to about £3 trillion, roughly 95% of GDP, and the budget deficit continues to widen. Higher oil prices—Brent at $101.75 and WTI at $90—have pushed UK headline CPI to 3.1% in August from 2.9% in July, with core inflation at 2.6%. This has increased the risk that the Bank of England will hike interest rates at its November meeting.
FTSE 100 technical analysis shows the index has fallen from a July high of 10,990 to around 10,523, slipping below the 50-day exponential moving average. It has reached the 38.2% Fibonacci retracement and formed a falling megaphone pattern, which technical analysts sometimes view as a bullish reversal signal. Investors now look to euro zone retail sales data, US and UK earnings season next week, and central bank signals for the next direction in risk assets.
