European stocks closed down 1.78% as central bank rate hike expectations heat up

International oil prices rise, adding inflation concerns. U.S. and European bond yields surged on Friday as investors shifted expectations toward rate hikes by central banks, dragging down stock markets. U.S. stocks came under pressure, while European markets initially rose then fell. The pan-European Stoxx 600 index closed volatile, plummeting 1.78% for a three-day losing streak, ending at 573 points, the lowest of the day in whole points, after a brief intraday rebound of 1%.

London Brent crude oil hit $119 per barrel on Monday but then retreated. It rebounded on Friday, rising to $112.53, up more than 3.5%. The UK 10-year government bond yield surpassed 5%, reaching its highest level since the 2008 financial crisis, with the two-year yield climbing a total of 44 basis points this week.

Traders increased the probability of a 10% rate hike by the Federal Reserve in October to 50%, reversing previous expectations of rate cuts. Investors now see over a 50% chance that the European Central Bank will raise rates at its next meeting in April. The market also predicts a 100% chance that the Bank of England will hike rates in June, with no expectation of rate cuts this year.

The UK FTSE 100 index closed at 9,918 points, down 1.44% or 145 points. Germany’s DAX index ended at 22,380 points, down 2.01% or 459 points. France’s CAC 40 closed at 7,665 points, down 1.82% or 142 points. Italy’s FTSE MIB finished at 42,840 points, down 1.97% or 860 points. Spain’s IBEX 35 ended at 16,714 points, down 1.14% or 191 points.

Although Israel signaled a temporary halt on attacks against Iran’s energy facilities, Iran continues to carry out attacks in the Persian Gulf region. Meanwhile, according to U.S. news website Axios citing four sources, the Trump administration is considering occupying or blockading Iran’s main oil export hub, Kharg Island, to pressure Iran and reopen the Strait of Hormuz.