If European markets have felt heavy, there is a reason. Stocks in the region notched three straight weeks of declines as investors weighed what elevated energy costs could mean for inflation and policy rates. Into this session, the Stoxx Europe 600 was little moved by midafternoon in London after trimming losses that had reached 0.7% at one point. Recent performance shows Europe has fallen more than other regions.
Oil's jump handed energy shares the day's top spot. A video emerged in which an adviser to Iran's top leader said the confrontation with the US could shift to the Indian Ocean during a subsequent phase, helping push Brent crude up 2.1% to $105 a barrel. The other side of the ledger was technology, which was the biggest drag as investors focused on rising borrowing costs with US Treasuries sliding again.
The 30-year US yield pushed to levels last seen in 2004 and surpassed Wednesday's peak, a backdrop that tends to restrain equity valuations and put more weight on earnings delivery. At the stock level, Hennes & Mauritz AB slipped 1%, with tariff refunds obscuring a decline in its Q3 profit margin. SEB downgraded the Finnish firm to hold from buy, pointing to concerns that weaker-than-anticipated orders for the newly acquired Labrie unit might cool growth, and Hiab Oyj dropped 6.3% as a result. There is even a Markets Pulse question making the rounds: could 30-year Treasury yields hit 6% this year?
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Higher yields are starting to bite. As ING's chief investment strategist, Simon Wiersma, put it, "My base case is not that higher yields trigger a broad equity bear market, but they are likely to cap valuation expansion and make earnings growth increasingly important." Translation for your wallet: in a world where rates are doing more of the talking, companies that actually grow profits are more likely to get the benefit of the doubt.
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