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European shares drop as bond rout sparks profit taking

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(Reuters) – European stocks fell on Friday as investors booked profits in high-flying technology shares due to concerns over rising inflation and interest rates on the back of a jump in bond yields.

The benchmark European stock index was down 0.6%, paring earlier losses but still on track to record its first weekly fall this month. London’s FTSE 100 slipped 0.2% and Germany’s DAX lost 0.1%, both well off session lows.

“Equity markets across the U.S. and Europe are quite expensive now and with bond yields constantly rising, the fixed income market is proving to be more attractive than the riskier equity market,” said Roland Kaloyan, a strategist at SocGen.

“Investors are actually looking at the pace at which yields drop and the current speed is quite concerning for equity markets.”

Asian markets fell to a one-month low, while the dollar rose from a three-year trough as the 10-year U.S. Treasury yield hit a one-year high, sparking fears the heavy losses could trigger distressed selling in other assets. [MKTS/GLOB] [FRX/]

Euro zone government bond yields, however, stabilised on Friday, although Germany’s benchmark yield was still headed for its biggest monthly jump since 2016.

Technology stocks bore the brunt of this week’s sell-off after powering the global stock market recovery last year as assurances from European Central Bank chief Christine Lagarde and other policymakers failed to stem the rise in yields.

Still, the benchmark STOXX was tracking its best monthly gain since November, helped by a rotation into energy, banking and mining stocks on expectations of a pickup in business activity following vaccine rollouts.

Better-than-expected fourth-quarter earnings have also reinforced optimism about a quicker corporate rebound this year. Of the 194 companies in the STOXX 600 that have reported quarterly earnings so far, 68% have beaten analysts’ estimates, according to Refinitiv.

“As recovery hopes gain ground with the economy re-opening and vaccines coming up, coupled with earnings being relatively positive, the near-to-mid-term outlook for equities seems positive with yield movements still a part of the equation,” said Keith Temperton, an equity sales trader at Forte Securities.

Germany’s Deutsche Telekom gained 0.3% after it reported forecast-beating fourth-quarter results as its merged U.S. unit T-Mobile continued to drive growth.

British Airways-owner IAG gained 3.2% even after it recorded a 7.43 billion euro ($9 billion) loss last year and warned it could not say when normal flying conditions would return.

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