Europe midday: Bond yields, oil prices weigh on Stoxx 600

(Sharecast News) - Rising bond yields and a surging oil price were weighing on European stock markets on Thursday, as investors await an interest rate decision from the European Central Bank.

Heavy losses in Paris and Milan dragged the benchmark Stoxx 600 index 0.6% lower after two days of gains sent it to a two-week high on Wednesday.

The ECB is widely expected to keep interest rates unchanged when it announces its decision at 1315 BST, leaving the deposit facility rate at 2.25% after a 25-basis point rise in June.

However, expectations for a near-term rate hike are growing, according to analysts, with the European rate market now pricing in two to three increases in the year ahead.

"Yields in the eurozone have risen to fresh year-to-date highs ahead of today's meeting, highlighting in part that market participants are expecting hawkish policy guidance from the ECB today," said Lee Hardman from MUFG.

Meanwhile, the euro rose against the dollar, hitting a one-week high of $1.142, while bond yields jumped, with the German 10-year Bund yield briefly hitting 3.2%, its highest since mid-2011.

"We see little scope today for President Lagarde to push back strongly against market expectations for multiple rate hikes given inflation risk are increasing. Higher energy prices will add to downside risks for growth in the euro-zone as well," Hardman said.

Brent crude was up a further 4.5% at $98.28 a barrel after Iranian-backed Houthi militants targeted two Saudi oil tankers in the Red Sea. The move follows more threats from Donald Trump to bomb Iranian infrastructure.

"There seems little sign that tensions will cool between Washington and Tehran in the near term - though investors have been through enough handbrake turns in this conflict to not take anything for granted," said AJ Bell investment director Russ Mould.

In company news, shares in Nestle fell sharply after the food and drink giant sold half of its water division to PE firm Platinum Equity for $3.4bn. The Swiss group announced the creation of a joint venture called Peranel, while reporting first-half results which showed a 31.4% slump in net profits.

Segro was rising strongly in London after announcing that it would be minded to recommend a �14bn final takeover approach by US logistics giant Prologis should a firm offer be made.

Italian banking stocks were weighing on the FTSE MIB after UniCredit underwhelmed with a 6.6% reported increase in revenues and record profits in the second quarter.

Meanwhile, BNP Paribas fell in Paris despite announcing a 33% surge in second-quarter profits.