Tech knocks European shares to one-week lows on rate hike worries

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European shares touched their lowest level in over a week on Tuesday, with tech stocks weighing the most, as a rise in two-year U.S. Treasury yields reflected ramped-up bets for a U.S. policy rate hike as soon as March.

The pan-European STOXX 600 index dropped 1.3%. Tech stocks declined 2.5% as two-year yields, which track short-term rate expectations, crossed 1% for the first time since February 2020.

“With the FOMC and BoE already in tightening mode, it is difficult not to see the ECB similarly changing tack and moving policy towards fighting inflation also, particularly given the impact of soaring energy prices and the expectation that these are expected to continue their steady rise higher,” said Stuart Cole, head macro economist at Equiti Capital.

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“We had a good start to the year, but that early euphoria has waned, and equities might have difficult couple of weeks in the run up to the Federal Reserve meeting.”

The STOXX 600 hit record highs at the start of this month, but the rally was eased since then as hawkish central banks, geopolitical tensions and soaring energy prices kept investors on edge.

Investors will be watching the next Fed meeting, due on Jan. 25-26, as central bank officials signaled they would start raising interest rates in March to curb inflation, which rose 7% last month from a year earlier – the fastest pace in almost 40 years.

The energy sector was the only one trading higher on the day, up 0.1% as crude prices touched their highest level in more than seven years.

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Among individual stocks, Swiss asset management firm GAM Holding slumped 9% after saying it expected to report a roughly 30 million franc net loss for 2021 when it reports earnings next month.

French food caterer Sodexo jumped 2.3% after Reuters reported Bain Capital was looking to bid for a stake in its benefits and rewards services unit.

Chocolate maker Lindt & Spruengli fell 3.3% after saying a slowdown in its North American business in the second half of 2021 was partly due to temporary supply chain bottlenecks at its Russell Stover brand.

(Reporting by Anisha Sircar in Bengaluru; Editing by Subhranshu Sahu and Amy Caren Daniel)