European shares drop on inflation risk concerns; Lagarde speech eyed

(Reuters) – European shares fell 1% on Monday as hopes of a vaccine-led global economic recovery fuelled a rally in commodities and raised concerns over the risk of higher inflation.

FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 18, 2021. REUTERS/Staff/File Photo

The pan-European STOXX 600 index was on course for its worst day this month, led by declines in technology companies and retail stocks.

Germany’s benchmark stock index fell the most among its European peers, down 1.3%.

Yields on Germany’s benchmark 10-year bond jumped to their eight-month high, putting upward pressure on borrowing costs in the euro area.

“European equities are currently trading at quite higher valuations and with the current upward trajectory in bond yields, it might lead to further added pressure on equities,” said Roland Kaloyan, a strategist at SocGen.

“However, equity markets even on current valuations are equipped to absorb the rise in U.S. treasury yields up to 1.5% but any rapid spike in yields would definitely hurt equity markets.”

Europe will decide whether to extend the suspension of its rules limiting budget deficits and debt, known as the Stability and Growth Pact (SGP), in coming weeks, the Commissioner for Economy Paolo Gentiloni said.

Britain’s FTSE 100 dropped 1%, while investors awaited Prime Minister Boris Johnson’s plan to gradually reopen the battered economy.

Meanwhile, focus is likely to turn to European Central Bank chief Christine Lagarde’s speech later in the day and U.S. Federal Reserve Chairman Jerome Powell’s semi-annual testimony before Congress on Tuesday.

In company news, security firm G4S dropped nearly 10% to the bottom of the STOXX 600 index after Canada’s GardaWorld said it would not raise its offer further.

British pub operator Mitchells & Butlers fell 1.5% after it reported a plunge in sales as all its sites have been forced shut under the latest lockdown, and launched an open offer to raise 351 million pounds ($491.47 million).

French car parts maker Faurecia fell 1.5% even as it targeted its sales close to 25 billion euros ($30.29 billion) and an operating margin above 8% of sales by 2025.

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