(Bloomberg) -- European stocks pared earlier declines and closed nearly flat on Tuesday in a volatile session as strong US retail sales data boosted bond yields and reinforced the case for the Federal Reserve to keep interest rates higher for longer. Investors were also tracking the latest diplomatic efforts to contain the Israel-Hamas war.

The Stoxx Europe 600 was largely unchanged at the close in London, with gains in consumer products and retail sectors somewhat offset by losses in the telecom and construction sectors. 

US retail sales increased last month by more than forecast in a broad advance that suggests durable household demand. The data prompted a jump in Treasury yields and gains in the dollar as traders boosted their bets on another Fed rate hike.

European investors increasingly believe monetary policy is too restrictive, while the possibility of overtightening is now a key concern, Bank of America strategists said following their latest survey of fund managers in the region. They noted renewed interest in value stocks, with 20% of the survey’s participants expecting value to outperform growth stocks.

In individual stock moves, Lonza Group slumped after the Swiss life-sciences company’s outlook for 2024 profit margins fell short of expectations. Sika dragged construction sector after it fell most since 2020 on a price target cut. Rolls Royce Holdings Plc gained after saying it’s cutting as many as 2,500 positions and will streamline the business, enacting the deepest job cuts yet under Chief Executive Officer Tufan Erginbilgic. Ericsson AB slipped after it said market weakness that has depressed sales will persist into the fourth quarter.

US President Joe Biden is set to visit Israel Wednesday as a show of solidarity after the Oct. 7 attack by Hamas, which is designated a terrorist organization by the US and European Union. The American president will also travel to Jordan, where he’ll meet with Arab leaders in an effort to contain the conflict. 

“Markets are seemingly extrapolating previous conflicts in Palestine which didn’t turn into regional conflicts. They will likely be right in the end, but it’s too early to rule out an escalation,” said Roberto Scholtes, head of strategy at Singular Bank. 

Uncertainty is set to last for several weeks at least, Scholtes added, “Investors should definitely get ready for it, seeking diversification and hedges in assets such as short-term government bonds, gold, oil and the energy sector, while the dollar should remain strong for the time being.”

For more on equity markets:

  • Italian Equities Set to Face Sovereign Risk Again: Taking Stock
  • M&A Watch Europe: Orsted, Wendel, Frasers Group, Abivax, BNP
  • Sanofi’s EuroAPI a Rare Loser Among European Spinoffs: ECM Watch
  • US Stock Futures Rise; Marathon Oil, D.R. Horton, Organon Gain
  • Rolls-Royce to Cut 2,500 Jobs Globally: The London Rush

You want more news on this market? Click here for a curated First Word channel of actionable news from Bloomberg and select sources. It can be customized to your preferences by clicking into Actions on the toolbar or hitting the HELP key for assistance. To subscribe to a daily list of European analyst rating changes, click here.

--With assistance from Michael Msika and Macarena Muñoz.

©2023 Bloomberg L.P.