UKX FTSE 100 Index

By Barbara Kollmeyer, MarketWatch , David Hodari

Bank stocks are on the upswing, apart from Danske Bank

European stock benchmarks retreated Thursday, tracking a global equity pullback as a tumble in U.S. bond prices triggered global losses for assets perceived as risky as yields climbed.

What are markets doing?

The Stoxx Europe 600 dropped 1.1% to close at 379.68, after closing up 0.5% on Wednesday (http://www.marketwatch.com/story/europe-stocks-rebound-amid-hopes-over-italy-eu-budget-resolution-2018-10-03). The declined represented the sharpest one-day slide for the benchmark since Aug. 15, according to Dow Jones Market Data.

Germany's DAX 30 slipped less severely than its peers, down 0.4% to finish at 12,244.14, after reopening from a holiday on Wednesday. Meanwhile, Greece's ASX Composite gained 1.4% to close at 676.36.

France's CAC 40 tumbled by 1.5% to 5,410.85, marking its worst day since Sept. 5, and the FTSE 100 index dropped 1.2% to 7,418.34, representing its firmest daily fall since mid August.

Rising bond yields coincided with a pause in an uptrend for the dollar (http://www.marketwatch.com/story/dollar-rally-stalls-as-global-yields-move-higher-2018-10-04), which left the euro up to $1.1499, compared with $1.1480 late Wednesday. The pound traded at $1.2978, versus $1.2939 late Wednesday.

What is driving the market?

The yield on 10-year Treasury note yield , a bellwether for risk sentiment around the world, rose to 3.188% midday Thursday, from 3.159% late Wednesday, its highest level since July 2011. Global yields followed suit. Bond prices fall as yields rise.

The yield on 10-year U.K. government debt, known as gilts, had climbed to its highest level since before the country voted to leave the European Union in 2016. Shares often follow government bond rates up, as investors move from assets perceived as safe into those viewed as riskier. A selloff in U.S. government bonds comes as investors bet on healthy economic expansion domestically.

Meanwhile, rising rates also force investors in stocks to reassess overall values because a low interest-rate regime has compelled investors to pile into riskier assets, with market bears warning that equity values have become elevated relative to risk-free sovereign bonds, according to Sophie Huynh, cross-asset strategist at Société Générale.

U.S. stocks traded lower, with the Dow Jones Industrial Average retreating solidly from records (http://www.marketwatch.com/story/dow-poised-to-retreat-from-records-after-five-day-rally-bond-yields-in-focus-2018-10-04), while Asian markets also tumbled Thursday.

Read:Tariffs for the 1%: Fur coats, fancy handbags and other luxury goods hit by trade war with China (http://www.marketwatch.com/story/tariffs-for-the-1-fur-coats-fancy-handbags-and-other-luxury-goods-hit-by-trade-war-with-china-2018-10-04)

(http://www.marketwatch.com/story/tariffs-for-the-1-fur-coats-fancy-handbags-and-other-luxury-goods-hit-by-trade-war-with-china-2018-10-04)A renewed focus on the U.S. administration's trade spat with China was also putting some investors on edge.

What are strategists saying?

With the world's two largest economies having in recent months imposed rounds of tariffs on the import of one another's goods, "the market's now waiting to see whether we get that second round of tariffs on Chinese goods that the Trump administration is threatening," said Mihir Worah, CIO of asset allocation and real return at Pimco. "I think we're likely to see an escalation, which wouldn't be great for markets, although we may get a walk-back or a deal later on."

"The rally in bond yields, if sustained, could have major implications on financial markets going forward," Fawad Razaqzada, technical analyst, Forex.com.

"It was during all those years post the financial crisis when they were falling which led to investors flocking to the higher-yielding stock markets in the first place. Now that bond yields are rising, this is eroding the attractiveness of equities on a relative basis. Thus, we could see funds flowing out of equities, leading to a correction for major global indices," said Razaqzada.

Stock movers

Among the top gainers were shares of BTG PLC (BTG.LN), which rose more than 5% after the pharmaceutical company upgraded guidance (http://www.marketwatch.com/story/btg-upgrades-guidance-says-chairman-to-retire-2018-10-04-94851837) and said Chairman Garry Watts plans to retire.

Rising bond yields were pushing investors toward banking stocks on the theory that those institutions benefit as interest rates rise. Commerbank AG (CBK.XE) up 3.5%, Credit Agricole SA (ACA.FR) rose 2.2% and Deutsche Bank AG (DBK.XE) (DBK.XE) gained 1.5%.

Danske Bank AS (DANSKE.KO) sank 4.6% after a report that the U.S. Justice Department will open a criminal investigation (http://www.marketwatch.com/story/criminal-probe-of-danske-banks-russian-money-laundering-charge-now-includes-us-justice-department-2018-10-04) into money-laundering allegations at the bank.

(END) Dow Jones Newswires

October 04, 2018 17:07 ET (21:07 GMT)

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