European Stocks Slide on Inflation Fears, Rising Bond Yields; ECB Rate Hike Seen as Certain

European stocks extended losses on Tuesday, dragged lower by a renewed surge in government bond yields and a spike in oil prices that deepened inflation fears and reinforced bets on imminent interest-rate hikes from both the European Central Bank and the Federal Reserve.

The pan-European STOXX 600 dropped 0.5% to 647.73, hitting a more than one-month low, after falling 0.6% on Monday. Germany’s DAX lost 0.8%, France’s CAC 40 slipped 0.1% (closing down about 0.22% from the previous close) and the UK’s FTSE 100 lost nearly 1% as traders returned from a long holiday weekend.

**Inflation Accelerates, ECB Path Hardens**

The sell-off was driven by data showing Eurozone inflation accelerated to 3.3% in August, the highest level since September 2023, up from 2.9% in July. The reading, in line with expectations, reinforced expectations that the ECB will raise its key interest rates by 25 basis points at its policy meeting scheduled for September 9-10.

“With Eurozone inflation reaching a near three-year high in August and unlikely to return to target over the medium term, a 25-basis point ECB rate hike on September 10 looks almost certain,” RTTNews reported.

**Bond Yields Hit Multi-Year Highs**

A global bond rout deepened, driving sovereign borrowing costs across Europe to levels not seen in years. Germany’s 30-year government bond yield hit a fresh 15-year high, while France’s 30-year yield touched its highest level since 2008, as traders assessed escalating Middle East tensions and awaited key US labor market data later this week.

The yield on France’s 30-year note reached levels last seen more than a decade and a half ago, according to RTTNews.

**Oil Surges on Middle East Strikes**

Brent crude futures rose toward $92 a barrel on Tuesday, gaining about 2.3%, and extended gains above $94 overnight, reaching the highest level in nearly six weeks. Escalating fighting between the US and Iran heightened concerns over further disruptions to energy flows through the Strait of Hormuz.

According to reports cited by RTTNews, Iran retaliated with attacks on the UAE and Jordan after US forces targeted an island in the Strait of Hormuz. Tehran launched missile and drone attacks towards US-linked sites in Bahrain, Jordan and Kuwait in defiance of a warning from US President Trump. US Central Command announced a fresh wave of attacks against IRGC targets, citing Tehran’s attempts to lay mines in the strait and an earlier attack on a US military base.

Brent crude futures extended gains for a third consecutive session, rising toward $96 a barrel, as Tehran warned it would prevent oil exports from the Gulf, adding to uncertainty around energy supplies.

**Fed Rate Hike Odds Also Jump**

The inflation worries extended across the Atlantic. Federal Reserve Governor Michael Barr said in a speech Tuesday that he would back a rate hike if inflation doesn’t cool quickly. According to the CME FedWatch tool, the probability of a quarter-point rate hike at the Fed’s September 15-16 meeting now stands at 68.2%.

US stocks closed lower for the third straight day overnight, with the Nasdaq Composite losing 1%, the Dow shedding 0.8% and the S&P 500 declining 0.7%. The yield on the benchmark 10-year US Treasury note hit a 20-month high amid the heightened Middle East tensions.

**Energy Stocks Gain, Cyclicals Slide**

The latest rout saw significant divergence across sectors. Shares of energy companies rose as oil prices climbed — TotalEnergies gained 1.5%, while BP Plc and Shell rose 1% to 3% in London. But most other sectors were under pressure.

Among individual movers, RTTNews reported that French automaker Renault eased by about 3.2%, while Saint Gobain, Stellantis, Pernod Ricard and Kering lost between 2.4% and 2.7%. Thales, Hermes International, Accor, ArcelorMittal, Safran, Airbus, Euronext and Schneider Electric fell 1% to 2%. Orange, LVMH, Michelin and BNP Paribas also showed weakness. Air Liquide moved up nearly 3%.

In the UK, Ashtead Technology Holdings slumped 4.7% after the subsea equipment rental specialist reported a 7% fall in first-half EBITA earnings. Retail giant Frasers dropped 1.4% after announcing it was reviewing its support for Hugo Boss’ supervisory board Chair Stephan Sturm. Homebuilder Bellway fell 2.6% after warning of slowing demand. Advertising group WPP dropped 1.6% as it announced plans to cut up to 1,000 additional positions by the end of the year.

In Germany, beauty and fragrance giant Symrise rose 1.3% after agreeing to sell its terpene ingredients business AmeriTerpenes LLC to private equity investor Mutares SE & Co. KGaA. Partners Group Holding plunged 7.6% after the Swiss private equity firm replaced chief executive officer David Layton following fund turmoil, RTTNews reported.

**Asian Markets Fall; Dollar Strengthens**

The risk-off sentiment spread to Asia, with tech-heavy indices leading regional declines after US chipmaker Nvidia reportedly struck a deal to buy open-source AI company Hugging Face for $12.9 billion. Dell Technologies boosted its annual revenue forecast by $25 billion, underscoring surging demand for AI servers, but the news did little to calm broader inflation fears.

The dollar held firm in Asian trade, while gold prices fell toward $4,300 an ounce amid indications that higher long-end Treasury yields were unlikely to retreat soon.

**Data Offers Little Respite**

Economic data provided no relief. US manufacturing activity eased in August, job openings in July came in softer than expected, and residential construction spending declined. The S&P Global France Manufacturing PMI rose to 51.1 in August from 49.8 in July, signaling renewed growth in factory activity, but that improvement was overshadowed by the broader inflation picture.

Friday’s US payrolls report, along with the release of August CPI data on September 11, are expected to offer further clues on the Fed’s rate trajectory and could set the tone for global markets.