European shares rebound after bond rout, inflation fuels rate worries

By Reuters News

By Sudeshna Ghoshal

Oct 2 (Reuters) - European stocks rebounded on Friday after a sharp selloff driven by a bond market rout, while investors parsed inflation data for fresh clues on monetary policy.

The pan-European STOXX 600 .STOXX rose 0.6% to 630.47 points by 1005 GMT, after touching its lowest in more than three months on Thursday.

Data showed euro zone inflation surged more than expected in September and is likely to rise further in the coming months, keeping pressure on the European Central Bank to raise interest rates again.

"Higher interest rates combined with elevated inflation are a negative for equities, but whether equity markets will react badly depends on how long investors feel the problem will last," said Michael Field, chief equity strategist at Morningstar.

The ECB lifted interest rates last month, and traders are currently pricing in 81.8% chances of a rate hike in December, LSEG data showed.

Equities have been battered in recent weeks as global government bond yields surged to multi-year highs, leaving investors averse to risk assets.

European banking stocks .SX7P dipped 0.3% and were on track for their worst week since April, hurt by concerns about higher interest rates denting the economy.

Germany's Commerzbank CBKG.DE dropped 1.4% after RBC downgraded the stock to "sector perform" from "outperform".

France presented its 2027 budget on Thursday, seeking to enact unpopular belt-tightening measures aimed at reducing the deficit and reassuring bond markets ahead of next year's presidential election.

Late last month, France's 10-year borrowing costs reached the highest since the global financial crisis in 2008.

"The French election and the French big fiscal problem is going to weigh on sentiment," said Ricardo Castillo, head of investments at Mirabaud Group.

Focus is on US nonfarm payrolls data expected around 1230 GMT, with forecasts estimating a gain of 90,000 jobs in September. A hot print could revive bets on a second rate hike from the Federal Reserve this month. Markets see a 25% change of a hike after two top policymakers said this week they wanted more data before deciding what to do next.

In Europe, technology shares .SX8P led sectoral gains, up 2.1%, boosted by advances in ASM International NV ASMI.AS and ASML ASML.AS.

Puma PUMG.DE rose 1.6%, reversing course after slipping earlier. US peer Nike NKE.N projected a surprisingly steep drop in full-year revenue as it continues to grapple with weak demand in China and heightened competition.

Shares in Julius Baer BAER.S rose 2.3% after the Swiss bank announced a share buyback programme of up to 600 million Swiss francs ($724 million).

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