LIVE MARKETS-What do rising bond yields mean for European stocks?

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

WHAT DO RISING BOND YIELDS MEAN FOR EUROPEAN STOCKS?

Higher bond yields are usually seen as negative for equities because they raise the hurdle companies must clear to justify their valuations. But UBS says the relationship is more nuanced.

The bank's data suggest investors can cope with either high yields or rising yields. The real trouble comes when yields are already elevated and then climb sharply again.

"The market is not falling on higher yields so much as narrowing under them," write UBS strategists Gerry Fowler and Sutanya Chedda.

When the U.S. 10-year yield was below 3%, even a weekly jump of more than 20 basis points still left 57% of MSCI Europe stocks higher, suggesting investors saw higher yields as a sign of stronger growth.

Once yields moved into the 4-4.5% range, the picture changed. In weeks when yields fell, 61% of stocks advanced. When yields rose by more than 20 basis points, only 30% did.

"Above 4.5% the level in isolation is benign; it is the sharp weekly increase that does the damage: as the discount rate rises, the growth hurdle required to hold investor attention rises with it, and fewer companies clear it."

That said, UBS argues yields are rising for good reasons. Rather than signalling inflation fears, they reflect a broad investment boom across defence, AI, infrastructure and power.

That helps explain why some sectors have prospered despite higher rates. Over the past three months, energy, banks, chemicals and basic resources have outperformed, while utilities, telecoms, food & beverage and consumer products have lagged.

The key distinction, UBS says, is not between cyclicals and defensives, but whether earnings growth is strong enough, and valuations low enough, to offset the drag from higher rates. In such markets, investors should favour companies that combine growth with reasonable valuations, it says.

(Danilo Masoni)

EARLIER ON LIVE MARKETS:

"NOT YOUR USUAL FRENCH DRAMA" CLICK HERE

STOXX DIPS IN ERRATIC TRADE AS TECH DRAGS, ENERGY UP CLICK HERE

BEFORE THE BELL: BOND SELLOFF SENDS EUROPEAN FUTURES LOWER CLICK HERE

DIPLOMACY TAKES A BACK SEAT CLICK HERE