European stock took a hit on Tuesday, reaching their lowest point in six months. This drop was mainly caused by declines in utility and mining companies’ stocks, which are sensitive to changes in interest rates. The reason behind this is that many investors believe that the United States will keep its interest rates high for a long time. This belief has pushed up the yields on U.S. Treasury bonds and strengthened the value of the dollar.
The recent release of strong economic data and the approval of a U.S. funding bill, which prevents a government shutdown, contributed to the dollar’s rise to its highest level in 11 months. Additionally, the yield on the 10-year U.S. Treasury bond reached its highest point in 16 years.
The STOXX 600, which represents European stocks, dropped by 1.1%, reaching its lowest point since March 24. At the same time, the primary stock indexes in the United States also saw a decline.
Steve Sosnick, the chief strategist at Interactive Brokers, explained, “The significant decrease we observed during the afternoon is mostly due to the U.S. futures.” He noted that this drop occurred when U.S. bond traders began selling off their bonds, causing a ripple effect that affected European stocks as well.
The utilities sector took a significant hit, with the utilities index dropping by 2.7% to its lowest point in over 11 months. This decline was driven by the expectation of higher interest rates.
Companies in the offshore wind industry were also affected. Orsted, a developer in this field, saw its shares fall by 6.0%, reaching their lowest level in more than five years. Similarly, Vestas Wind Systems’ shares slid by 5.5%.
Peter Garnry, the head of equity strategy at Saxo Bank, explained, “The reason behind these drops is that higher interest rates and increased prices for raw materials have significantly changed the assumptions that were made when planning offshore wind projects. Many of these projects were initially based on the idea of having permanently low interest rates and cheap industrial metals.”
Mining companies saw a decline of 2.6% as copper prices hit a four-month low due to the strong dollar.
Deutsche Bank has revised its economic growth forecast for the euro area in 2023, now predicting only a 0.4% growth rate. They also mentioned that there’s a possibility of a mild recession in the region during the second half of the year.
All sub-indexes in Europe were in the negative, including bank stocks, which dropped by 0.9% as they are sensitive to economic conditions.
U.S. Federal Reserve officials, such as Governor Michelle Bowman and Fed Vice Chair for Supervision Michael Barr, stated on Monday that they plan to keep monetary policy restrictive for a while longer to bring down inflation and reach the Fed’s 2% target.
The shares of the German online fashion retailer, Zalando, fell by 5.3% because Deutsche Bank lowered its prediction for adjusted earnings before interest and taxes. Similarly, the British luxury company Burberry saw a 3.6% decline in its shares after a downgrade by UBS.
Boohoo, a British online fashion retailer, experienced a drop of 2.8% in its shares. This was because the company announced that the recovery in sales volumes was slower than expected, which could lead to minimal or no improvement in its total revenue for the entire year.
