What do rising bond yields mean for European stocks?
VGK•UBS says European stocks have been more vulnerable when bond yields are already elevated and rise sharply: when yields were in the 4-4.5% range, 30% of MSCI Europe stocks advanced in weeks yields rose more than 20 basis points, versus 61% when yields fell.
1. Yield moves and stocks
UBS strategists Gerry Fowler and Sutanya Chedda say the relationship between bond yields and equities is nuanced. When the U.S. 10-year yield was below 3%, 57% of MSCI Europe stocks rose in weeks when yields jumped more than 20 basis points. In the 4-4.5% range, 61% of stocks advanced in weeks yields fell, compared with 30% when yields rose more than 20 basis points.
2. Growth and valuations
UBS says yields are rising for reasons including a broad investment boom across defence, AI, infrastructure and power, rather than inflation fears. Over the past three months, energy, banks, chemicals and basic resources outperformed, while utilities, telecoms, food and beverage, and consumer products lagged. The strategists say earnings growth and valuations determine whether companies can offset the drag from higher rates.
