Europe's STOXX 600 hits one-month low as inflation, rising yields pressure markets

European shares fell on Tuesday, pressured by a fresh rise in government bond yields, while euro zone inflation data reinforced expectations that the European Central Bank will raise ‌interest rates next week. The pan-European STOXX 600 slipped 0.6% to a more than one-month low of 647.08.

Britain's FTSE 100 eased 0.3% as trading resumed after Monday's public holiday, while Germany's DAX slipped 1.1% and France's CAC 40 fell 0.4%. Euro zone government bond yields climbed to fresh multi-year highs as Europe joined a global ‌bond selloff and data showed inflation rose above 3% in August, driven by higher energy costs. That strengthened expectations the European Central Bank will raise ‌interest rates next week.

Traders expect a 25-basis-point rate hike, LSEG data showed. Germany's 30-year government bond yield earlier hit a 15-year high, while France's 30-year yield climbed to its highest level since 2008.

European natural gas prices have surged in recent days, with Dutch and British benchmark contracts rising after the first direct exchange of attacks between the U.S. and Iran in ⁠a month renewed ​fears of prolonged supply disruptions. "After a long ⁠focus on equities and the income they provide, there is now a much more compelling case to look at bonds for retail investors to provide diversification, especially as equities begin to ⁠dread the prospect of rate hikes around the globe and the return of inflationary pressures," said Chris Beauchamp, chief market analyst at IG.

Hawkish comments from Federal Reserve Chair ​Kevin Warsh last week, alongside higher energy prices, have prompted investors to price in further rate increases from major central banks. Euro zone manufacturing ⁠activity grew at its fastest pace in more than four years in August, driven by the strongest rise in new orders since early 2022 and robust output growth, an S&P Global survey ⁠showed.

Signs ​of economic resilience and strong corporate earnings helped lift the STOXX 600 to a record high in early August, but the index has since lost about 2%. Energy stocks rose 1.8% as Brent crude traded above $92 a barrel.

Novartis jumped 6.3%, among the top gainers on the STOXX 600, after the Swiss ⁠drugmaker said its oral multiple sclerosis drug remibrutinib met the main goals in two late-stage trials and outperformed a rival treatment. Reckitt Benckiser Group added 4.4% ⁠after a U.S. jury sided with its ⁠Mead Johnson unit in a lawsuit alleging its Enfamil preterm baby formula caused a serious bowel disease.

Partners Group shed 7.3% after the Swiss private equity firm said its CEO was stepping down and warned its performance income ‌would be lower than ‌expected.