European bank stocks led markets lower Thursday, ahead of key financial sector earnings in the United States, as global interest rate markets retreated amid eroding risk sentiment.
The Stoxx Europe 600 Banks index, the broadest measure of financial sector performance, fell 1.28% to a one-month low of 171.85 points in the open hours of trading amid sharp declines for HSBC plc (HSBC) (-1.66%), Deutsche Bank AG (DB - Get Report) (-1.1%), BNP Paribas SA (BNPQY) (-1.95%) and Banco Santander SA (SAN) (-2.24%).
The moves were linked in part to a rally in global fixed income markets, which helped take benchmark German borrowing costs to their lowest level of the year as investors piled into risk-free assets amid rising geopolitical tensions and reset assumptions for central bank rate hikes after comments from U.S. President Donald Trump and slowing domestic inflation readings.
Yields on 10-year German bunds, which move inversely to prices, fell 3 basis points in early European trading to 0.17% while two-year bund yields, known as schatz, were also on the move, falling 3 basis points to -0.88% after Germany's statistics agency confirmed that inflation in Europe's largest economy slowed to 1.5% last month, a sharp pullback from the 2.2% reading that was recorded in February.
Bank stocks generally react to changes in government bonds yields, with prices falling when the difference between short and long term rates narrow as investors adjust profit assumptions based on a bank's ability to borrow cheaply and lend dearly.
Global bond markets have been extremely active this week amid rising tensions in Asia and the Middle East, notably in relation to threats from North Korea and a standoff between Russia and the United States over last week's airstrikes in Syria. That helped push 10-year Treasury note yields to a November low of 2.23% this week, extending a rally that is set to deliver the biggest one-week fall in yields since last June.
The moves were given further force yesterday after Trump told the Wall Street Journal that he felt the dollar is "getting too strong" and that he hoped the Federal Reserve would keep interest rates low as a result. The dollar index, a measure of the greenback's strength against a basket of six global currencies, fell nearly a full percent in the wake of the interview before stabilising at around 100.10 by 10:00 BST.
Bank earnings will essentially kick-off the first quarter earnings season on Wall Street later Thursday, with reports expected from Wells Fargo (WFC - Get Report) , JPMorgan (JPM - Get Report) and Citigroup (C - Get Report) .