European equities retreated Tuesday, with the pan-European STOXX 600 closing down 0.2% at 645.94 points after touching one-month lows earlier in the session. Retail was the worst-performing sector, shedding 2.3%, while major national indices broadly followed lower.
Germany's DAX dropped 0.5% to 25,839.33, France's CAC-40 lost 0.26% to 8,280.63, and Britain's FTSE 100 fell 0.3% to 10,756.45. Italy's Ftse/Mib decreased 0.24% to 51,792.10, Spain's Ibex-35 declined 0.23% to 19,779.00, and Lisbon's PSI20 gave up 0.77% to 9,405.31.
The selloff was driven by a sharp rise in government bond yields alongside mounting concerns over energy-driven inflation. Germany's 10-year bund yield climbed to its highest level since April 2011, raising borrowing-cost pressure across the region. Brent crude traded above $94 a barrel, adding to inflation worries as geopolitical tensions between the United States and Iran escalated to the most severe point in weeks.
Europe's heavy reliance on energy imports makes it particularly exposed to oil-price spikes. The fiscal burden of elevated public debt in France, Italy, and the United Kingdom also came under renewed scrutiny as higher interest rates threatened to widen financing gaps for heavily indebted governments.
On the monetary-policy front, data compiled by LSEG shows investors price in nearly a 100% probability that the European Central Bank will raise rates by 25 basis points next week, with markets also anticipating an additional 50-basis-point hike by the end of the year.
Gordon Kerr, a strategist at KBRA, said the medium-term backdrop remains supportive but noted near-term headwinds. "The scenario is still relatively positive and growth has been surprising to the upside, at least from a European perspective. That gives us some support. But the concern over elevated prices is what is generating short-term uncertainty," he said.
Brent crude futures fell 1.2% in the session, while the German 10-year yield futures contract (DE10YT) declined 0.38%, reflecting the mixed tone between commodity moves and rate-sensitivity across asset classes.
