Europe close: Stocks erase gains as bond yields inch higher

(Sharecast News) - European stocks had erased earlier gains to finish slightly lower on Tuesday as elevated bond yields kept a lid on risk appetite across the continent.

The Stoxx 600 was down 0.1% at 508.28 by the close, having risen as much as 0.6% in morning trade.

France's CAC 40, in particular, finished just 0.2% higher after having surged 1.2% earlier on, as investors watched political developments in Paris as new French prime minister Fran�ois Bayrou outlined his top priorities in a general policy speech to parliament.

Bayrou said that renegotiating some parts of president Emmanuel Macron's controversial pension reforms might be possible as he attempted to win support to pass the 2025 budget.

The yield on 10-year French OAT bonds was up 1.6 basis points at 3.476%, continuing to trade at levels not seen since late-2023. Meanwhile, 10-year German bund yields were up 3.5bp at 2.629%, their highest since July, while 10-year UK gilt yields rose 0.3bp to a 16-year high of 4.895%.

"The higher government bond yields go, the greater the competition against equities for investors' money. At some point, investors will take the view that they can get a decent yield from bonds for lower risk compared with investing in stocks," said Dan Coatsworth, investment analyst at AJ Bell.

"Companies trading on high multiples of earnings are vulnerable to share price weakness. Rising bond yields can lead to investors being less willing to pay a premium rating for a share, leading to deratings. Many of the big tech stocks are ones to watch given their premium equity ratings."

A weak start on Wall Street was also weighing on market sentiment on Tuesday as investors showed caution ahead of a key inflation reading on Wednesday, which may indicate how the Federal Reserve will alter monetary policy in the coming months.

Market movers

Leading the downside on the Stoxx 600 was British retailer JD Sports Fashion which dropped 86% after downgrading its full-year profit forecast as it posted a drop in revenue for November and December in challenging markets.

Energy major BP was also out of favour after saying it now expects to report lower upstream production for the fourth quarter.

European peers Repsol and TotalEnergies were also lower, pulling back after tracking oil prices to their highest levels since August. Brent crude was down 1% at $80.22 a barrel by the close.

Italian fintech group Nexi was a heavy faller on the Stoxx 600 after Morgan Stanley downgraded the stock to 'underweight' from 'equalweight'.