By Sruthi Shankar and Shreyashi Sanyal
(Reuters) -European stocks sank to their lowest in a week on Tuesday as a surge in government bond yields knocked high-growth technology shares, with fresh signs of a slowdown in China's economy weighing on investor sentiment.
The pan-European STOXX 600 index was down 2.2%, its biggest one-day decline in over two months as a jump in U.S. Treasury yields signalled that investors were bracing for higher rates and the risk of persistent inflation. [US/]
Technology stocks fell 4.8% to hit their lowest in two months after their Wall Street peers continued to sell off. They are particularly sensitive to rising interest rate expectations as their value rests heavily on future earnings, which are discounted more deeply when rates go up. (N)
Meanwhile, data showed profit growth at China's industrial firms slowed for a sixth month in August, with an unfolding power crisis becoming a growing threat to output and profits.
"The pandemic situation remains unresolved. The Chinese economy is slowing and authorities have yet to stimulate forcefully. The Fed is preparing to normalise policy. And the debt ceiling showdown is ongoing," analysts at BCA Research wrote in a note.
"Heightened uncertainty combined with elevated speculation suggests that the near-term path will be bumpy."
The weak sentiment across markets overshadowed a survey that showed the mood among German consumers brightened unexpectedly heading into October.
Germany's DAX fell 2.1%, France's CAC 40 was down 2.2% and Britain's FTSE 100 shed 0.5%.
While the benchmark STOXX 600 is on course to extend its quarterly winning run, a volatile September took some shine off its third-quarter gains as investors priced in risks of easing global growth momentum and tighter monetary policies.
European Central Bank chief Christine Lagarde said on Monday inflation in the euro zone could exceed its already raised projections, while Federal Reserve Chair Jerome Powell said the central bank would move against unchecked inflation if needed.
"We now think that euro zone headline inflation will soon hit 4% and that it will average 2% in 2022. But headline and core inflation still look set to fall over the course of next year, with both settling at uncomfortably low levels for the ECB," said Jack Allen-Reynolds, senior Europe economist at Capital Economics.
However, a rally in Brent crude futures above $80 per barrel continued to support energy stocks, with the oil and gas index rising 0.3% to fresh highs since February 2020. [O/R]
Swiss computer peripherals maker Logitech slid 7.3% as Morgan Stanley (NYSE:MS) downgraded the stock to "underweight".
Dutch semiconductor supplier ASM International fell 3.8% despite raising its third-quarter order intake guidance.