Written by 9:40 am Europe Economy

European shares drop as BOJ’s policy shift dents risk appetite By Reuters


© Reuters. FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, December 19, 2022. REUTERS/Staff

By Amruta Khandekar

(Reuters) -European shares fell on Tuesday, pulled down by real estate stocks, after the Bank of Japan (BOJ) rattled global markets with a surprise policy shift that would allow long-term interest rates to rise further.

The region-wide index was down 0.5% by 0914 GMT, but came off a one-month low hit earlier in the session.

The BOJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0% target, wider than the previous 25-basis-point band, in a move aimed at easing some of the costs of prolonged monetary stimulus.

The policy tweak was widely seen as the beginning of a potential end to Japan’s ultra-loose monetary policy and comes just as hawkish messages from other major central banks last week doused hopes of an end to monetary policy tightening any time soon.

“It’s a very minor policy adjustment. It’s just that it’s the first from the Bank of Japan from a very long time, perhaps acknowledging that some of the inflation that they’re seeing, they will potentially need to react to in the future,” said Gerry Fowler, head of European equity strategy at UBS.

“It’s a moment where the market is realizing the direction of travel even for the Japanese central bank is to potentially see yields move higher at least in a precautionary way in case they need to deal with persistent inflationary pressures.”

index was down 0.3% as German 10-year bond yields jumped to their highest levels in more than a month. Data showing an easing in producer prices for the second straight month in Europe’s largest economy did little to calm market jitters.

With markets heading into the holiday season, the festive cheer has been dampened by the prospect of rates staying higher for longer and hopes for a year-end rally have dimmed.

Rate-sensitive real estate stocks led the losses in the STOXX 600, falling 2.5% to hit their lowest in more than six weeks. Automakers followed suit, with losses of 1.4%.

The real estate sector was also dragged lower by shares of Aroundtown SA and Derwent London, which fell 11.4% and 3.5% respectively, after Berenberg cut their price targets.

Miners shed 0.3% as prices fell on worries about demand from China after fresh COVID-19 cases hit the country’s industrial activity. [MET/L]

Among individual stocks, shares of Orange slipped after the French telecoms group said its deputy chief executive and head of finance is leaving the company.

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