European equity markets declined on Thursday, 22 May, as weak eurozone economic data and rising bond yields, driven in part by fiscal concerns in the United States, prompted a broad sell-off across sectors.
The pan-European STOXX 600 index fell by 0.8% in early trading, retreating further from the two-month high reached earlier this week.
The downturn was triggered by a combination of soft business sentiment data and elevated yields on government bonds. The latest flash composite Purchasing Managers’ Index (PMI) from Hamburg Commercial Bank (HCOB), compiled by S&P Global, showed a fall to 49.5 in May from 50.4 in April. This reading marked a return to contraction territory, with activity below the 50-point threshold that separates growth from decline.
The services sector, which has played a key role in sustaining the eurozone’s recent economic resilience, recorded a notable drop in demand. Manufacturing, while still subdued, showed some signs of stabilisation. “It’s worrisome that the main culprit is the service sector, which has long been the main engine of growth for the eurozone,” said ING chief economist Bert Colijn. “The trade war is weighing on the eurozone economy, but likely mostly through the uncertainty channel rather than direct trade effects so far.”
The figures reinforced concerns over the health of the euro area economy at a time when global financial conditions are tightening. Investors have become increasingly cautious amid ongoing geopolitical and trade tensions, and as expectations around central bank rate cuts remain fluid.
US Fiscal Policy and Bond Market Tensions
Investor sentiment was further dampened by developments in the United States, where proposed tax reforms by President Donald Trump have reignited concerns about the trajectory of federal borrowing. The plan, which seeks to extend and expand previous tax cuts, is forecast to add trillions of dollars to the national debt. The House of Representatives on Thursday voted along party lines to advance the debate on the bill, with a vote on final passage expected imminently.
These fiscal concerns have pushed yields on 10-year US Treasury notes to a three-month high, reflecting both reduced demand for bonds and fears of mounting inflationary pressure. The impact was not limited to US markets: German bund yields also rose, with long-term yields reaching a two-month high on Thursday, reflecting broader global bond market volatility.
The rise in yields has led to a reassessment of risk across asset classes. Equities, particularly those sensitive to interest rates such as technology and property, have come under pressure. Bank stocks posted mixed results, as higher interest rates can boost lending margins but also signal potential strains on credit demand.
Company-Specific Developments
In corporate news, British chemical company Johnson Matthey saw its shares surge 28%—the largest single-day gain in years—after announcing the sale of one of its business units to US firm Honeywell International for £1.8 billion ($2.4 billion), including debt. The deal was positively received by investors, who view it as a strategic move to streamline operations.
In contrast, Swedish video game holding company Embracer Group fell by 15.3% after issuing a forecast for marginal revenue growth and flat earnings for its 2025/26 fiscal year. The company also confirmed that at least one of its nine planned AAA game releases would be delayed beyond 2027.
Elsewhere, German telecoms provider Freenet AG dropped 14.8% following the release of its first-quarter earnings, which failed to meet market expectations. The results added to the broader downward trend on the DAX, Frankfurt’s benchmark index, which mirrored losses across most major European bourses.
Market Outlook
The recent developments have sharpened focus on upcoming data and central bank policy statements. The European Central Bank is widely expected to begin easing monetary policy later this year, but the timing remains uncertain in light of the current economic indicators. A further deterioration in business sentiment could accelerate calls for a rate cut, while persistent inflation or elevated bond yields may delay such action.
Market participants are also monitoring US economic data and the legislative progress of the Trump administration’s fiscal proposals, which could have wider repercussions for global risk appetite.
For now, analysts warn that equity markets may continue to face headwinds. “The environment remains fragile,” said one Frankfurt-based strategist. “We have weaker macro data, no progress on trade, and renewed fiscal concerns out of Washington. That’s a difficult mix for investors to navigate.”
As volatility persists, investors appear to be positioning defensively, favouring cash and shorter-duration assets while awaiting greater clarity on the economic and policy outlooks on both sides of the Atlantic.
