European stocks pressured by yields, but mark weekly gains on firm cyclicals

(Reuters) – European equities closed lower on Friday as bond yields rose on inflation expectations that were pushed up by strong U.S. payrolls data, although the STOXX 600 index marked a weekly gain on strength in growth-sensitive sectors.

FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, March 3, 2021. REUTERS/Staff

The pan-European STOXX 600 dropped 0.8% on the day, with shares of travel and financial services firms leading losses.

But the index rose 0.9% for the week, as optimism over an eventual economic recovery this year saw investors pile into sectors most likely to benefit from a bounceback. Automobile stocks outpaced their regional peers with a 4.9% jump.

U.S. Federal Reserve Chair Jerome Powell on Thursday said the recent spike in yields did not warrant intervention by the central bank to bring them down.

U.S. and European bond yields pushed higher after his statements, while U.S. yields were also supported by stronger-than-expected payrolls data, which pushed up inflation expectations.

But analyst expectations for euro zone growth are much tamer this year, with some even welcoming the rise in local bond yields as a sign of reflation.

“In the U.S., improving growth expectations are raising the term premium and justifying at least some of the higher pressure on yields. However, the situation in the European area (EA) is very different,” analysts at TS Lombard wrote in a note.

“The U.S. Congress is about to pass a large fiscal stimulus package, while EA governments struggle to commit to higher spending… slack in EA economies is expected to persist at least until mid-2022, in contrast with the U.S.”

Still, rising inflation expectations this year have pushed up yields and pressured high-growth tech companies and steady dividend-paying sectors such as utilities and healthcare in recent weeks.

Technology was the weakest-performing European sector for the second week in a row, while utilities and healthcare also lagged.

Data showed orders for German-made goods rose by twice as much as expected in January as robust foreign demand more than offset domestic weakness. Analysts expect overseas demand to support the euro zone manufacturing sector this year.

Oil stocks rose 0.7%, supported by crude prices rising to near 14-month highs after OPEC and its allies agreed not to increase supply in April.

Among individual movers, London Stock Exchange Group dropped to the bottom of the STOXX 600 as analysts scrutinised the costs for integrating data and analytics company Refinitiv.

French aircraft manufacturer Dassault Aviation fell 3% after recording a drop in quarterly adjusted operating income.

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