European stocks advanced on Tuesday, extending a broader global equity rally as investors became more optimistic ahead of the third-quarter earnings season, while a retreat in long-dated bond yields and lower oil prices helped ease concerns following last week’s sharp fixed-income selloff.
The pan-European STOXX 600 rose 1%, marking its third consecutive session of gains. US stock futures also moved higher, with Nasdaq and S&P 500 futures each gaining about 0.2% after a technology-led rally pushed the Nasdaq to a record close on Monday.
The improved sentiment came as bond markets showed signs of stabilizing following a turbulent period in which rising government borrowing concerns, persistent inflation and shifting expectations for monetary policy pushed long-term yields to multi-year highs.
Register for the next Tekedia Mini-MBA.
Register for Tekedia AI in Business Masterclass.
Join Tekedia Capital Syndicate and co-invest in great global startups.
The euro recovered 0.2% to $1.1239 after falling to a 17-month low overnight. The currency remained under pressure, however, as investors continued to assess fiscal and political risks across the euro zone.
France remained a particular focus. A selloff in French government bonds triggered by an unpopular budget proposal had shown signs of spreading into other euro zone bond markets at the beginning of the week. Political uncertainty also increased after Spanish Prime Minister Pedro Sanchez called a snap election on Monday.
French bond markets steadied on Tuesday. The yield on the 10-year French government bond fell 9 basis points to 4.77%, after climbing to its highest level since the 2000s last week.
Marine Le Pen, the far-right leader and frontrunner in next spring’s presidential election, said she wanted to reduce France’s budget deficit to 3% by 2030, adding another dimension to the country’s fiscal debate.
“European sovereigns have had a little bit of pressure coming off and France is looking in a better position overnight,” said James Klempster, deputy head of multi-asset at Liontrust in London.
“On the one hand you’ve got quite material pressure being felt on the government bond side. But elsewhere the corporate side of things actually don’t look too bad. You’ve got companies whose earnings remain very robust. We’re getting into the earnings season fairly soon, expectations for that are pretty high.”
The shift in sentiment was also supported by expectations that corporate earnings could remain resilient even as bond markets face pressure.
Third-quarter earnings season begins next week. Goldman Sachs estimates that consensus forecasts imply 27% growth in S&P 500 earnings, with companies benefiting from artificial intelligence infrastructure spending expected to account for more than half of that increase.
Nvidia, the world’s most valuable company and a major bellwether for the AI investment boom, rose 1% in premarket trading, putting it on course for a market value of about $5.8 trillion.
That positioning highlights the growing importance of AI-related investment to the earnings outlook. Strong results from major technology companies could provide further support for equity valuations, particularly if companies demonstrate that heavy spending on AI infrastructure is translating into revenue and profit growth.
Oil prices also helped improve market sentiment. Brent crude fell 0.4% to $99.91 a barrel after declining 1.9% overnight. Resilient Middle East crude exports and a G7 emergency stockpile release eased immediate supply concerns, although security risks in the region continued to limit the decline.
Asian markets broadly followed Wall Street higher. Japan’s Nikkei gained 1.1%, while Hong Kong’s Hang Seng index rose 0.7%. South Korean shares, however, fell nearly 1% after reopening following a holiday.
Bond Market Risks Remain
The easing in bond-market pressure has not removed the underlying concerns about government finances and inflation. Sovereign yields remained close to multi-year highs as investors continued to assess elevated borrowing needs and the possibility that inflation could remain persistent enough to constrain central banks.
The premium investors demand to hold French 10-year bonds over German debt narrowed to 129.79 basis points after widening last week to its highest level since the euro zone debt crisis in 2011. German 10-year yields, the benchmark for the euro zone, fell 5 basis points to 3.44%.
Christian Nolting, global chief investment officer at Deutsche Bank Private Bank, said the current market stress did not represent a repeat of the European debt crisis.
“We don’t think there’s a similar crisis happening as 15 years back with Greece and the European Union,” Nolting said, adding that the European Central Bank now has backstop tools available to address episodes of market stress.
The US Treasury market also experienced some relief after long-dated yields reached fresh multi-year highs overnight. The 10-year Treasury yield fell 3 basis points to 5.2815%, while the 30-year yield declined 2.8 basis points to 5.6356%.
The rise in Treasury yields has been particularly notable because it has occurred alongside a sharp reduction in expectations for a Federal Reserve rate increase this month. Markets now assign a 22% probability to a rate increase, down from 71% a week earlier, following a soft US jobs report and comments from policymakers calling for more evidence before further tightening.
The divergence underpins the extent to which bond markets are being driven by factors beyond immediate expectations for central-bank policy. Investors are also weighing inflation risks, government borrowing and the supply of long-dated debt.
The dollar weakened against most major currencies, with the dollar index falling 0.16% to 101.99. It has nevertheless gained 3.5% over the past month, maintaining pressure on currencies such as the euro.
Gold, meanwhile, continued to benefit from the uncertain macroeconomic environment. Spot gold rose 0.3% to $4,152.97 an ounce.
The broader market picture therefore remains mixed. Equity investors are now focused on strong corporate earnings and the economic benefits of AI investment, while bond investors continue to demand higher compensation for inflation, fiscal, and supply risks.