Europe's STOXX 600 ends lower as tech selloff, rising Fed hike bets weigh

The STOXX 600 index closed 0.7% lower on Tuesday, weighed down by concerns over interest rate hikes and a decline in tech stocks driven by AI spending worries.

Europe's benchmark STOXX 600 closed lower on Tuesday, as expectations for imminent interest rate hikes by the Federal Reserve and concerns ‌around increased corporate spending on AI dented sentiment.

The pan-European index closed 0.7% lower, after paring some of its earlier gains. It had hit its lowest level since June 12, with most sectors trading in negative territory. Stocks in Asia fell earlier in the day and those on Wall Street also saw ‌sharp declines. Crude oil fell about 1% while gold slipped more than 2%.

The tech sector was the biggest weight on the ‌STOXX 600 with a 3.7% fall, logging its biggest daily drop since February as investors globally reassessed companies that rallied earlier this quarter on AI enthusiasm. Chipmakers Infineon and STMicroelectronics declined 6.3% and 8.5%, respectively, while semiconductor equipment makers ASML and Aixtron slipped 5.7% and 8.3% respectively.

European tech stocks have been the biggest gainers among major sectors this quarter. However, as ⁠borrowing costs ​tick higher, companies banking on debt-backed spending ⁠are likely to come under pressure. Infineon and STMicroelectronics are among those that have recently tapped the debt markets. "If...the companies need to continue raising debt before they're earning sufficient ⁠returns on that investment, investors could start to question the profile of the debt and the potential earnings sustainability on the equity side," said Kiran Ganesh, managing ​director, global head of investment communications at UBS.

"This debt issuance is a trend that investors will need to keep watching out for ⁠the next one or two years." Alongside, investors raised bets on monetary policy tightening in the U.S., with traders now pricing in a 25 basis-point hike and an over 50% ⁠chance ​of another similar increase by end-2026, LSEG-compiled data showed.

Markets are also holding on to bets that the ECB will lift borrowing costs by another 25 bps later this year, despite European Central Bank President Christine Lagarde downplaying second-round inflation fears on Monday. Traditionally defensive sectors gained, with ⁠healthcare up 1.9% and consumer-facing stocks such as food and beverages up 1.7%.

European mining shares shed 3.3%, tracking declines in precious metal prices. Among others, Bunzl ⁠topped the STOXX 600 with ⁠a 5.6% rise after British business supplies distributor upgraded its annual revenue growth outlook after a strong first half.

Signify plunged 14.8% after the world's largest lighting company updated its strategy to target an adjusted EBITA margin of ‌around 10% by ‌2029.