European Stocks Fall 0.6% as U.S. Yields Rise, Tax Bill Passes

European stock markets experienced a downturn on Thursday, as concerns over rising bond yields dampened investor interest in risk assets. The Stoxx Europe 600 index closed down 0.6%, following a disappointing U.S. Treasury auction that drove yields higher and contributed to a significant decline in U.S. markets the previous day. The consumer goods and automotive sectors were the worst performers, while personal care and chemical sectors fared better.

Renewable energy stocks, including Vestas Wind Systems and Worley, saw declines. This was in response to a new tax and spending bill proposed by Republican lawmakers in the U.S. House of Representatives, which aims to accelerate the phase-out of tax incentives for clean energy production. The bill was narrowly passed by the House of Representatives around midday London time.

The rise in U.S. yields and disappointing corporate earnings have hindered the upward momentum of European stocks this month. Investors are now focusing on trade negotiations between Europe and the U.S., as well as the progress of the U.S. tax reform bill, which is currently under review by the Senate.

“The deteriorating debt situation in the U.S. was confirmed by the recent downgrade, which could be seen as both good and bad news for Europe,” said Michael Field, chief equity strategist. “The negative aspect is the concern over contagion risk, but on the positive side, investors might view Europe as a safer haven compared to the U.S., which is already reflected in the performance of European stocks.”

As the U.S. House of Representatives passed the Trump tax reform bill, selling pressure in the U.S. Treasury market intensified, leading to a decline in European major indices. The bill, which includes significant tax cuts, reductions in social spending, and an increase in federal debt, will now move to the Senate for review. The Senate, which has a slim Republican majority, will decide the bill's fate.

The bill is estimated to increase the U.S. budget deficit by approximately 270 billion dollars over the next decade. Investor concerns over the U.S. debt crisis have escalated, following Moody's downgrade of the U.S. sovereign credit rating from the highest level of Aaa to Aa1. This downgrade has led to a surge in U.S. Treasury yields, with the 30-year yield reaching around 5.1%, the highest level since 2023, and the 10-year yield trading just below 4.6%.

On the previous trading day, all three major U.S. stock indices declined, with the Dow Jones Industrial Average falling by more than 800 points and the S&P 500 index down by 1.6%. The poor results of a 20-year Treasury auction drove yields higher, exacerbating the stock market decline. If the Trump tax reform bill is passed by the Senate and becomes law, the situation could worsen further.

“This reflects the impact of the speed of yield changes, not just the gradual upward trend,” said Kevin Gordon, senior investment strategist. “All of this is driven by inflation concerns, which are linked to the budget deficit and further influence the direction of the dollar.”