Europe close: Rising yields sink markets as Stoxx 600 hits three-week low

European stocks dropped sharply on Wednesday with losses of more than 1% across most of the continent as rising bond yields tempered the demand for equities.

The Stoxx 600 index fell 1.1% to 513.45, its lowest closing level since 6 May, with indices in Paris and Milan dropping 1.5% each, and losses of 1.1% in Frankfurt and 1.2% in Madrid. London's FTSE 100 fell 0.9%, with losses mitigated by a series of M&A news.

German 10-year bund yields were rising nearly 10 basis points to 2.694% – their highest level so far this year – after the annual inflation rate in Germany rose to 2.4% in May. This was in line with expectations, but up from a three-year low of 2.2% and the first increase in inflation since December, which may have concerned many heading into Friday's eurozone CPI reading.

Meanwhile, 10-year UK Gilt yields were up 13 basis points at 4.411% – the highest since November 2023 – while the yield on a 10-year US Treasury was up 6.7% at a one-month high of 4.624%.

"With Friday bringing both the eurozone CPI and US core PCE inflation metrics, this week could serve to highlight the growing concern that we are likely to see inflation remain above 2% for the remainder of this year," said Joshua Mahony, chief market analyst at Scope Markets.

In other news, consumer confidence in Germany rose to its highest since April 2022, according to the latest Consumer Climate Indicator from GfK and the Nuremberg Institute for Market Decisions. The headline index rose for the fourth straight month, with the indicator for June increasing to -20.9 points, from a revised -24.0 the month before. This was ahead of the consensus forecast for a smaller improvement to -22.5.

M&A activity moves stocks in London

Royal Mail owner International Distribution Services rose 4% after accepting a £5.3bn takeover deal from Czech billionaire Daniel Kretinsky. However, the deal must first be approved by the UK government, which has the power to intervene and block it.

Mining giant Anglo American fell 4% after rebuffing BHP Group's request to extend its 'put up or shut up' offer deadline, advising shareholders to take no action in response to the latter's latest attempt to sway the mining group into a £39bn takeover deal.

Meanwhile, Wood Group said it was evaluating a fourth and final "unsolicited, preliminary and conditional" takeover proposal from Dubai-based engineering and consulting firm Sidara at 230p a share, which compares with Tuesday's closing price of 190.3p.

Outside of London, shares in Polish video-game developer CD Projekt dropped sharply after underwhelming with its first-quarter results the previous day.