By Nikhil Sharma and Shashwat Chauhan
(Reuters) - European shares dipped on Wednesday, as bond yields surged after investors priced in fewer interest rate cuts in Europe and the U.S. this year, while concerns about new tariffs under Donald Trump's presidency also weighed on sentiment.
The pan-European STOXX 600 closed down 0.2%, with most regional bourses also in the red.
Yields across European government bonds shot up, with the those on the German benchmark 10-year notes hitting their highest level in more than five months, mirroring a rise in U.S. Treasury yields. [GVD/EUR]
British government bonds took a bigger beating, sending the 30-year yields to a new 26-year high in a move that will add pressure to government finances.
The UK's midcap index tumbled 2%, while France CAC 40 led declines in euro zone markets with a 0.5% drop.
Data on Tuesday showed euro zone inflation accelerated in December, prompting traders to scale back expectations of rate cuts from the European Central Bank later this year, although they stuck to bets of a 25 bps rate cut in January and March.
Another set of data on Wednesday showed German industrial orders and retail sales unexpectedly fell in November, while euro zone economic sentiment contracted in December.
Meanwhile, Trump was considering declaring a national economic emergency to provide legal justification for a series of universal tariffs on allies and adversaries, CNN reported, citing sources familiar with the matter.
"When you're talking about an economy like the United States, using language like that is unsettling," said Danni Hewson, head of financial analysis at AJ Bell.
"Those tariffs will cause pain to Europe as well as the global economy. It will cause trade friction and be inflationary in the United States, but also potentially inflationary across Europe as well."
Government bond yields have climbed in recent days, after upbeat U.S. economic data raised concerns that the Federal Reserve would slow its pace of policy easing.
Retail stocks were among the worst hit in Europe, falling 1.8%, while healthcare stocks, often considered a safer bet during times of uncertainty, rose 0.8%.
Novo Nordisk (CSE:NOVOb) rose 2.8% after UBS upgraded the drugmaker's shares to "buy" from "neutral".
The European aerospace and defence sector rose 1.1% after Trump called for higher spending from NATO allies at a press conference late on Tuesday.
Shell (LON:RDSa) slipped 1.4% after the energy major trimmed its liquefied natural gas production outlook for the fourth quarter.