European shares suffer steepest drop in two weeks as oil tops $100, ECB signals September hike

European shares suffered their steepest one-day drop in over two weeks on Thursday, as a surge in crude oil prices above $100 a barrel, hawkish central bank commentary and disappointing earnings weighed on markets.

The pan-European Stoxx 600 index fell 1.3% to 638.5 points, according to Reuters. The UK's FTSE 100 ended down 0.73%, Germany's DAX tumbled 1.56% and France's CAC 40 shed 1.64%, as reported by Nasdaq. Switzerland's SMI fell 0.71%. Markets across Austria, Czech Republic, Denmark, Finland, Greece, Iceland, Ireland, Netherlands, Poland, Portugal, Spain, Sweden and Turkey also closed weak.

Brent crude futures hit $100 a barrel on Thursday for the first time since May, Reuters reported, after Yemen's Houthis said they had attacked two Saudi oil tankers in the Red Sea, adding to concerns over global supply disruptions. Nasdaq reported Brent crude futures shot up to $101.22 a barrel, gaining more than 7%.

The rise in crude lifted European energy shares 1.54%, Reuters said. TotalEnergies gained 2.5% after reporting its strongest quarterly earnings in nearly three years, boosted by higher oil prices and robust refining margins.

**ECB flags September hike**

The European Central Bank kept interest rates unchanged on Thursday, as expected, after raising them for the first time in nearly three years at its previous meeting. The deposit rate stands at 2.25%, the refinancing rate at 2.4% and the marginal lending rate at 2.65%, according to Nasdaq.

Markets perceived ECB President Christine Lagarde's comments as suggestive of a potential hike in September, Reuters reported. The ECB acknowledged that the situation remains highly uncertain as the full impact of the energy shock caused by the Middle East conflict is yet to be felt, Nasdaq said.

"The ECB is clearly leaning hawkish. For all the data it will see and the analysis it will conduct between now and September, the decision will, to a large extent, come down to the trajectory of oil prices and conditions in the Middle East," said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, as quoted by Reuters.

Rates traders are pricing in a 70% chance the ECB hikes again in September, and are anticipating around 75 basis points of tightening in total over the next year or so, according to a Reuters newsletter.

**Tech stocks hammered**

Tech stocks slipped 2.9%, Reuters reported, led by STMicroelectronics, which fell 17.7% after the chipmaker forecast third-quarter revenue slightly below market expectations. BE Semiconductor dropped 7.3% after its second-quarter results. In Germany, Infineon plunged more than 6%, Nasdaq reported.

Sentiment towards tech stocks has been mixed as investors have punished US hyperscalers such as Alphabet for raising AI spending, while beneficiaries of that spending struggle with lofty valuations.

"You're seeing more questions being asked about where's the future revenue going to come from... twelve months ago the rage was about hyperscalers and the same questions were asked. Now, the semis came into the fall," said Rushabh Amin, multi-asset portfolio manager at Allspring Global Investments, as quoted by Reuters. "Even if you have decent earnings, there is a kind of drag coming from a slight unwind in sentiment and in positioning."

Alphabet's free cash flow in the first quarter turned negative for the first time since the company floated more than 20 years ago, and Tesla's free cash flow turned negative for the first time in two years, according to the Reuters newsletter.

**Food and beverage drag**

The food and beverage index fell 4.1%, Reuters reported, weighed down by Nestle, whose shares tumbled nearly 8%, marking their biggest loss since 1989. The company raised its full-year organic sales outlook but said it would sell part of its water and premium beverages business to Platinum Equity.

In the UK, Centrica tumbled more than 10% after saying it would cut 1,300 jobs after half-year profit fell 18%, Nasdaq reported. Budget airline easyJet rose 2.7% despite a 70% drop in third-quarter profit, flagging strong summer demand, according to Reuters and Nasdaq.

Finnish forestry group Stora Enso reported a quarterly operating profit below market expectations, sending its shares down about 8.5%, Reuters said.

**Bond yields surge**

The rout extended to bond markets. Two- and 10-year US yields hit their highest in 18 months, and the 30-year real yield is the highest since 2008, nudging 3%, the Reuters newsletter reported. The 2-year German yield hit its highest in two years.

Rates traders are now pricing in 60 basis points of Federal Reserve hikes by April, the newsletter said.