By Stefano Rebaudo
Oct 7 (Reuters) - European stocks and the euro fell sharply on Wednesday as oil prices rose above $100 amid renewed Middle East tensions while concerns France's fiscal woes could affect broader debt markets continued to weigh on overall sentiment.
MSCI's main world stocks index fell 0.39%, while Europe's STOXX 600 was down 1.02% at 630.12. It hit 624.85 last week, its lowest level since June 12.
“In the very early stages of the fourth quarter, typically the best quarter of the year
for equity returns, markets are being driven by a confusing ‘stocks up, US breadth down, yields up, oil down and up, and down...’ narrative,” said Jeremy Batstone-Carr, an economist at Raymond James.
Brent crude rose 1.2% to $101.83 per barrel as the market weighed supply constraints from a storm heading for US oil-producing regions and attacks by Yemen's Iran-backed Houthis on Saudi Arabia.
Aneeka Gupta, director of research at WisdomTree credited still "really strong" earnings expectations for the stock market's relative resilience in the face of rallying oil prices.
"That's what's really holding up the market so far," Gupta said.
"We haven't seen a big, strong sell-off and that's primarily because earnings are doing the heavy lifting," she added.
Nasdaq futures fell 0.75% while S&P 500 futures were down 0.35%. The S&P 500 hit a new record on Tuesday, up about 0.6% on the day, while the tech-heavy Nasdaq gained 0.4% to also mark an all-time high.
The French yield spread against safe-haven German Bunds — a market gauge of the risk premium investors demand to hold French debt — was 11 basis points (bps) wider after narrowing for two days. It was last at 139.50 bps, and reached almost 160 bps last week.
French bonds have been under pressure as expectations of higher European Central Bank rates and political uncertainty before the 2027 election raise doubts over France's ability to fix its finances.
"Clearly the market is punishing France on its level of debt," WisdomTree's Gupta said.
"Over the course of time, we'll get a bit more clarity (about the fiscal outlook). But for now, I think there will be volatility tied to the French bond markets."
EURO DOWN ON RATE DIVERGENCE, FISCAL CONCERNS
The rekindling of investor concerns weighed on the euro, which slipped 0.62% to $1.1188. It slid to a 17-month low against the dollar at $1.1161 earlier this week.
Wider yield spreads in the euro area weigh on the single currency by boosting expectations of ECB monetary easing, reviving worries about fiscal sustainability and stoking fears of increasing fragmentation in the euro area.
Markets closely watch also the so-called rate divergence between the US and the euro area as markets priced in a more hawkish Federal Reserve after the mid-September policy meeting.
"The interest rate spread between Germany and the US became more negative, which provided support to the US dollar against the euro," Georgette Boele, senior currency and oil strategist at Abn AMRO, said.
"We continue to believe that financial markets are pricing in too many rate increases by the Fed and the ECB," she said.
US TREASURY AUCTIONS, FED MINUTES IN FOCUS
Market participants will closely watch a 10-year Treasury bond auction later in the day and a 30-year auction on Thursday, which will show the depth of investor demand for US debt, analysts said.
US longer-dated yields hit a 24-year high on Monday amid a persistent selloff since late August due to concerns over inflation and the fiscal outlook.
The dollar index, which measures its performance against a basket of currencies, rose 0.49% to 102.34 following a 0.27% slide in the prior session.
The Federal Reserve on Wednesday will publish the minutes of its September 15-16 policy meeting, which will be scrutinised for clues about potential rate moves over the next few months.
Traders cut the odds of a Fed rate hike in October to 19% from about 50% a week earlier.
(Reporting by Stefano Rebaudo, additional reporting by Dhara Ranasinghe; Editing by Thomas Derpinghaus, Jamie Freed, Kevin Buckland and Tomasz Janowski)
