European shares drop on dour earnings, rate hike concerns

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, Aug 16, 2023. REUTERS/Staff/File photo

European shares dropped on Thursday, with a slew of downbeat earnings weighing on sentiment as well as rising bond yields on further signs major central banks will keep interest rates higher for longer.

The pan-European STOXX 600 closed 0.9 percent lower, hitting the lowest in over a month during the session.

Benchmark 10-year government bond yields rose across the euro area, a day after the U.S. Federal Reserve’s July meeting minutes revealed division over whether more rate hikes were needed.

“Hawkish expectation towards central banks to keep rates higher for longer have intensified, with some pricing in a September Fed hike after all… even strong UK wage growth figure this week fed concerns over stickier-than-expected inflation that would be much harder to bring down to target,” said Andreas Bruckner, European equity strategist at Bank of America.

The industrials index led the overall market decline, down 2.8 percent, dragged by a 39-percent tumble in Dutch payments processor Adyen NV, which missed first-half earnings estimates. The stock was the top STOXX 600 laggard.

Technology, construction & materials and travel & leisure were other slumping sector indexes.

Luxury sector shed 1.9 percent to a near five-month low, with China-exposed LVMH and Hermes International losing over 2 percent each, among major drags on STOXX 600, on continued worries over the Chinese demand outlook.

“The debt sustainability issue in China is also weighing because Europe is more reliant on the global growth cycle as it has an open economy and is more geared towards China than other equity markets,” Bruckner added.

The benchmark STOXX 600, dented by signs of slowing growth in China, has underperformed its U.S. peers this year, with its 6.8 percent gain well below the 14.7 percent jump in the S&P 500 index.

Further, Norway’s benchmark Oslo stock exchange eased 0.2 percent after the country’s central bank raised its benchmark rate by 25 basis points to 4 percent.

Danish hearing aid and audio solutions maker GN Store Nord dropped 9.4 percent after missing second-quarter sales estimate and narrowing full-year guidance, while Swedish heat pump maker Nibe lost 5.7 percent on lower-than-expected second-quarter results.

Second-quarter earnings for European firms are expected to decrease 4.6 percent from a year earlier, slightly less than the 4.8 percent-drop estimated last week, according to Refinitiv data on Tuesday.

BAE Systems shed 4.7 percent after Britain’s largest defense company said it agreed to buy Ball Corp’s aerospace assets.

Meanwhile, Swedish games developer Embracer topped the STOXX 600 with a 12.6- percent advance after reiterating full-year guidance, saying its restructuring program was on track.