Europe open: Stocks drop as bond yields surge worldwide

Stocks across Europe dropped on Wednesday morning on the back of surging bond yields across the globe.

The Stoxx 600 index was down 0.2% by 0913 BST, with Paris and Madrid down 0.3%, Frankfurt down 0.5% and Milan down 0.6%, offset slightly by London's benchmark index which was flat early on.

“Both equities and bonds are under pressure in Europe, taking their cues from weakness overnight in Asia and declines on Wall Street with the major averages all shedding over 1% on Tuesday," said Victoria Scholar, head of investment at Interactive Investor.

Government debt is being sold off across the board, with the US 10-year Treasury hitting a fresh 16-year high of 4.86%, Germany's 10-year Bund yield rising above 3% for the first time since 2011, and the UK 30-year Gilt yield jumping to a 1998 high of 5.115%.

"The moves have been driven by forecasts for higher for longer interest rates and strong US economic data that could embolden the Fed to carry out further tightening. All eyes are on Friday’s labour market figures with a strong US jobs report likely to exacerbate the market’s nervousness," Scholar said.

Meanwhile, Neil Wilson, analyst at Markets.com, reckons we're seeing a "paradigm shift" in the bond market. "Central banks are no longer buying bonds, they are selling them. This is a mechanistic explanation but simple and true – someone else has to buy the debt and there is a lot more of it now. This can only result in lower prices, higher yields. The great bond bull market is dead, a new bear market is taking over."

In European economic data on Wednesday, service-sector purchasing managers' indices (PMIs) across the Eurozone showed improvement in September, with the majority beating market expectations.

Notably, PMIs in both Spain and Germany returned to positive territory (above the 50-point level), showing that service-sector activity actually increased last month. Services PMIs in France and Italy still remain under 50.

In company news, UK retail giant Tesco beat expectations with its interim results as it lifted its profit guidance for the full year, as it managed to take advantage of easing consumer price inflation at the till.

Banking stocks were under pressure across the continent, with Banco Santander, Lloyds, HSBC and Banca Popolare di Sondrio all in the red.