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UPDATE 2-European shares dip as high yields, inflation concerns return to fore

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Sagarika Jaisinghani and Ambar Warrick
·2 min read
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* Commodity-linked sectors rally

* Bond proxies such as utilities, healthcare drop

* European stocks set for record highs in 2021 - poll

* AB InBev, Bayer slide as earnings disappoint (Updates to market close)

By Sagarika Jaisinghani and Ambar Warrick

Feb 25 (Reuters) - European shares ended lower on Thursday, as higher bond yields and volatility in U.S. markets offset optimism about a euro zone economic recovery, while weak earnings from Standard Chartered and Anheuser-Busch also weighed.

The pan-European STOXX 600 index settled 0.4% lower after rising as much as 0.5%, with a jump in euro zone and U.S. bond yields -- on expectations of increased inflation -- weighing on major stock sectors.

Euro zone economic sentiment rose more than expected in February, buoyed by more optimism in industry, services and among consumers, boosting inflation expectations which have fed into higher bond yields in recent weeks.

"Concerns about a resurgence of inflation only seem to have strengthened, judging by the relentless bear steepening of the U.S. Treasury curve and the newfound popularity of traditional inflation hedges such as commodities," analysts at Rabobank said.

"At this juncture, the pro-reflation arguments -- and particularly the fear of inflation induced by ultra-loose monetary and fiscal policies -- are clearly resonating with markets."

Sectors such as healthcare, utilities and other staples, which are considered bond proxies, fell on the day amid continued pressure from higher yields.

But commodity-linked sectors were among the best performers, boosted by multi-year highs in crude oil and base metal prices.

Weakness in U.S. markets due to profit taking in technology stocks also spilled over into Europe late in the session.

Easy money stimulus from major central banks last year has helped the benchmark STOXX 600 surge more than 50% since a coronavirus-driven crash in March 2020.

Although the European index has so far underperformed the U.S. S&P 500, which is scaling record highs, fund managers expect a rebound in corporate profits to send European stocks to all-time peaks by the end of 2021, according to a recent Reuters poll.

In company news, Standard Chartered slipped 6.2% after posting a drop in its annual profit.

Anheuser-Busch InBev, the world's largest brewer, tumbled 6.2% even as it reported a higher-than-expected core quarterly profit, while Bayer dropped 6.4% after posting a drop in fourth-quarter core earnings due to competition in the North American agriculture market.

In a bright spot, steel pipe maker Tenaris jumped 13.7% to the top of the STOXX 600 as quarterly sales rose from the previous quarter due to a pick up in drilling activity.

Shares of heavily-shorted airline Air France KLM rose nearly 2%, with traders saying a short squeeze was driving gains. (Reporting by Sagarika Jaisinghani in Bengaluru; editing by Uttaresh.V and Catherine Evans)