On Tuesday, European stocks declined while bonds yield rose due to an increase in euro zone business activity this month, leading to speculations that the European Central Bank would maintain a hawkish stance as inflation persists at elevated levels.
A survey revealed that euro zone business activity expanded faster than expected, driven by growth in the service sector, even as the manufacturing sector contracted. This prompted Germany's two-year bond yield, which is the most sensitive to interest rate expectations, to hit a 14-year high of 2.95%. It last rose 3 basis points to 2.923%.
The Euro STOXX 600 and German and French shares lost around 0.4% respectively, while Europe's biggest bank HSBC Holdings Plc fell 1% on a cautious outlook, even as its quarterly profit surged.
"The combination of better-than-expected economic activity at the start of the year and service sector inflationary pressures which remain elevated will likely keep the ECB in hawkish mode," analysts at ING wrote in a note.
- Germany's business activity grew for the first time in eight months in February, while France's PMI showed activity growing for the first time since October. These and other flash PMIs reflected a positive outlook for economic activity in Europe.
- Meanwhile, the British pound gained 0.4% against the dollar to $1.2088 and firmed against the euro after UK PMI data showed an unexpected bounce in British business activity, providing hope that the economy could avoid a deep recession.
Investors closely watched PMI data for insights into the future shape of monetary policy, as equity markets' strong start to the year after a difficult 2022 stalled in February.
"We are at a pivotal moment, where investors are thinking about restarting some positions," said Francesco Sandrini, head of multi-asset strategies at Amundi. "These numbers are really important."
The MSCI world equity index, which tracks shares in 47 countries, fell 0.2%. Wall Street was set for slim losses, with e-mini futures for the S&P 500 down 0.7%. U.S. flash February PMI data was due later in the day.
