Stocks tumble, bond yields rise in Europe after new economic data

European shares tumbled on Tuesday, while bond yields rose after new data showed that business activity in the eurozone had rebounded faster than anticipated.

The Euro STOXX 600 lost around one percent earlier in the session before recovering slightly later. The index eventually closed at 463.77, losing 0.19 percent or 0.87 points.

Germany's DAX concluded the trading session on Tuesday at 15,397.62, falling by 0.52 percent or 79.93 points. France's benchmark CAC-40 index closed at 7,308.65, tumbling by 0.37 percent or 26.96 points.

In Britain, the FTSE 100 also closed lower at 7,977.75, falling by 0.37 percent or 26.96 points.

On the same day, the yield on Germany's rate-sensitive two-year bond hit a 14-year high of 2.95 percent. The country's 10-year bond yield also rose slightly to 2.531 percent.

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France's two-year bond yield also increased to 3.094 percent, while the 10-year bond yield strengthened to 3.012 percent.

Analysts explained that the increase in economic activity in Europe in February, which contributed to the falling equity markets, was tied to higher-than-anticipated growth in the European service sector. Services companies in various countries reported higher activities this month, with France's service sector posting an eight-month high.

Although the manufacturing sector in Europe posted mixed data, the service sector could boost the eurozone's flash composite purchasing managers' index (PMI) to 52.3 from 50.3 in the previous month.

Dutch financial service firm ING predicted that the combination of higher-than-expected economic activity and inflationary pressures from the service sector would push the European Central Bank to maintain its tight monetary policy.

However, the new data did little to prop up the euro, which traded 0.2 percent lower at $1.067. The currency has lost almost two percent against the U.S. dollar this month and is on track to break its four consecutive months of gains.

Unlike the euro, the sterling gained 0.4 percent against the greenback to trade at $1.2088 after PMI data showed that business activity in Britain had rebounded. Analysts explained that the strong figure had increased expectations that the U.K. could avoid a deep recession.

Equity strategists said the new economic data came amid a "key moment" in the stock market that stalled this month after rallying in the first few months of 2023.

"We are at a pivotal moment, where investors are thinking about restarting some positions," Francesco Sandrini, head of multi-asset strategies at French asset management company Amundi, said. "These numbers are really important."

"There is a chance that the European economy proves more resilient than the U.S."

Mike Bell, Global Market Strategist at JPMorgan

JPMorgan global market strategist Mike Bell said Europe's economy could be more resilient than the U.S. However, Bell also warned that it remained unclear whether the economic slowdown in the country would affect Europe later.

Investors anticipate Fed minutes

The U.S. Federal Reserve will publish the meeting minutes of its rate-setting meeting at the beginning of this month. The central bank raised the U.S. benchmark interest rates by 25 basis points from the range of 4.50 percent to 4.75 percent. The minutes will provide information about the direction of the Fed's monetary policy in the coming months.

After the Fed raised its rates with a smaller hike, the U.S. economic data — job report and retail sales — revealed that inflation in the country had remained persistent last month. The market initially predicted that the Fed would soon pivot from its hawkish policy, but the expectation had shifted due to the new findings, said analysts.

Currently, investors predict that the federal funds rate will peak at around 5.3 percent in July and stay at that rate until the end of the year. The Fed is expected to conduct two more rate hikes in March and May.

The shift in investors' expectations has already influenced the financial market. The two-year Treasury bond yield went up by 3.5 basis points to 4.658. Meanwhile, the 10-year bond yield rose to 3.852 percent.