European markets in anticipation of ECB's rate hike

On Monday, European financial markets focused on the European Central Bank's (ECB) monetary policy. Investors in money markets are almost fully pricing in a 25-basis-point rate hike at Thursday's meeting. These tightened expectations, combined with escalating military tensions in the Middle East, are adding further pressure on European bonds.

The pan-European STOXX 600 index fell 0.1%, remaining near multi-week lows. Elevated government bond yields are putting particular pressure on sectors that are more sensitive to changes in interest rates.

Tighter expectations for the ECB were reinforced by preliminary eurozone inflation data for August. Annual inflation came in at 3.3%, an increase compared to the previous period, driven mainly by a 14.3% rise in energy prices. Meanwhile, core inflation, which excludes energy and food prices, edged down slightly to 2.4%.

Expectations of tighter monetary policy have also kept European government bond yields elevated. Germany's 10-year Bund yield stands at around 3.36%, while Italy's 2-year bond yield remains high as well.

Higher long-term interest rates are creating additional challenges for European equities as well. Technology and other high-growth companies, along with the construction and real estate sectors, are under particular pressure, as higher rates increase companies' financing costs and reduce the present value of future earnings.