Europe midday: Shares extend losses as bond yield worries persist

European shares extended losses on Thursday as worries over rising bond yields dampened investor sentiment.

The pan-European Stoxx 600 index was down 0.78% at 1213 GMT, with all regional bourses lower. London's FTSE 100 was off by more than 1% as Finance Minister Rishi Sunak's debt reduction plans unveiled in Wednesday's Budget came under closer scrutiny and the EU also threatened legal action over British plans to break the Brexit agreement.

In the US, benchmark 10-year US Treasury bond yields hit 1.477% overnight, off last week’s one-year high of 1.614%, “but going in the wrong direction from a market perspective”, said Spreadex analyst Connor Campbell.

“At the moment the Dow Jones isn’t set to double down on yesterday’s losses, but rather drift lower when trading gets underway, the futures pencilling in a 0.1% decline. If that starts to accelerate, however, we could see a return to the petrified scenes that closed out last month.”

CMC Markets analyst Michael Hewson said that while worries about asset values in the US “the same can’t be said in Europe where valuations are much lower”.

“This is likely to limit any downside for markets in Europe, even if yields do continue to edge higher in the US. It does become a bigger problem if the spike in yields in the US starts to infect yields elsewhere and there are signs of that happening, however with base metals prices starting to show signs of cooling we could see the pressure come off yields in the coming days.”

Investors were eyeing any potential response to the issue later today from Federal Reserve chairman Jay Powell.

“There has been some talk that the Fed might look at some form of operation twist where the Fed buys bonds at the long end, pushing yields down, and sells bonds at the short end. The problem with that is it pushes short term yields higher, at a time when overall debt levels are much higher,” Hewson said.

In the UK, the influential Institute for Fiscal Studies thinktank questioned whether Sunak could deliver debt cuts and reduce borrowing by the middle of the decade.

IFS director Paul Johnson also questioned whether Sunak could maintain his planned level of lower public spending in the context of the Covid-19 pandemic.

In equity news, shares in German airline Lufthansa fell after it posted record losses for 2020 and trimmed its 2021 capacity plans as the Covid-19 pandemic continued to hit its markets.

Vistry shares rose as the Housebuilder reported better-than-expected annual profits and resumed dividend payments driven by a strong second half performance.