European shares start week on shaky footing as bond yields rise

By Shristi Achar A and Shashwat Chauhan

(Reuters) -European shares ended lower on Monday as government bond yields rose amid warnings against premature rate cuts from European Central Bank officials, while beauty giant L'Oreal and lender HSBC dipped as separate brokerages turned bearish on their stocks.

The pan-European STOXX 600 ended 0.5% lower, as government bond yields across the region perked up after ECB's chief economist Philip Lane said in an interview on Saturday that cutting rates too fast could fuel a new wave of inflation. [GVD/EUR]

Separately, Bundesbank president Joachim Nagel, a known policy hawk, said it was too early for the ECB to discuss cutting interest rates.

Yield on the German 10-year bund, the region's benchmark, last stood at 2.201%.

"We do have this disjoint between market expectations and what central banks are planning on doing," said Daniela Hathorn, senior market analyst at Capital.com.

"We could see some downside pressure for equities, especially in Europe, once markets adjust their expectations that rate cuts are inevitably going to come, but not as soon as expected."

Traders are still pricing in around 150 basis points of rate cuts this year, with a more than 20% chance of the first cut coming as soon as March. [0#ECBWATCH]

Basic resources was amongst the top declining sectors, down 1.0% as most base metal prices came under pressure on a firmer dollar. [MET/L]

Personal and household goods lost 1.1% as Swedish gaming group Embracer retreated 8.8%.

Amongst headlining stocks on Monday, beauty giant L'Oreal dipped 4.8% after UBS downgraded its rating to "neutral" from "buy", while HSBC lost 2.2% after Exane BNP Paribas cut the British lender to "underperform".

Commerzbank moved up 0.8% after talks of a merger with Deutsche Bank resurfaced, according to a source familiar with the matter.

Banks, however, ended 0.7% lower.

Food delivery firms HelloFresh, Delivery Hero and Just Eat Takeaway fell between 4.2% - 8.3% after Exane BNP Paribas said it would "steer clear of the sector".

Dassault Aviation lost 6.4% after the French aircraft manufacturer reported 2023 aircraft deliveries below its target and Deutsche Bank downgraded its rating to "hold" from "buy", dragging the industrials sector down 0.9%.

On the data front, headline inflation in Sweden dropped to its lowest level since mid-2021 in December, while the German economy contracted 0.3% in 2023. The German DAX 40 ended 0.5% lower.

Also weighing on sentiment, China's central bank left the medium-term policy rate unchanged, defying market expectations for a cut.

(Reporting by Shristi Achar A and Shashwat Chauhan in Bengaluru; Editing by Mrigank Dhaniwala, Sohini Goswami and Christina Fincher)