European Stocks Remain Under Pressure: High Bond Yields Weigh on Markets

European stock markets remained unable to find direction on Wednesday and traded mostly near zero levels. Investors were assessing the results of the previous day's sharp global selloff, against the backdrop of which government bond yields rose to multi-year highs and significantly halted the summer equity rally.

The pan-European Stoxx Europe 600 remained almost unchanged and traded near the lows of the past two weeks. In the previous session, the index recorded its sharpest single-day decline in nearly a month. Germany's DAX fell 0.2%, France's CAC 40 rose 0.3%, while Britain's FTSE 100, Spain's IBEX 35, and Italy's FTSE MIB were almost unchanged.

Pressure on markets intensified particularly on Tuesday, when rising military tensions in the Persian Gulf, increasing oil prices, and multi-year highs in government bond yields pushed investors to exit risky assets.

Germany's 10-year Bund yield rose to 3.22% — the highest level since May 2011. Meanwhile, the yield on the U.S. 30-year Treasury bond exceeded 5.30%.

High interest rates have a particularly negative effect on growth-oriented sectors, including technology, software, and real estate, as higher discount rates reduce the current value based on companies' future cash flows.

In addition, when government bonds offer relatively high yields to investors, the appeal of equities diminishes. As a result, asset managers may reallocate part of their capital from equities to higher-yielding government securities.