Europe stocks set for worst week in nearly a year as Middle-East jitters grip

FRANKFURT: Europe’s STOXX 600 struggled for direction on Friday as the war in the Middle East showed no signs of abating, setting up the index for its worst week in nearly a year.

The pan-European benchmark inched 0.1 percent lower by 0927 GMT, hovering near its one-month low. It was down nearly 5 percent for the week.

The healthcare index slid 1 percent, bruised by Zealand Pharma’s 32.3 percent slump and Roche’s 3.1 percent fall after the mid-stage trial results for their experimental obesity treatment fell short of investor expectations.

Keeping losses in check, the aerospace and defense index rose 1.4 percent. Geopolitical tensions dominated the sentiment, sending oil prices surging nearly 16 percent over the week and stoking fresh inflation worries in a region that relies heavily on imported Middle Eastern energy.

Three European Central Bank policymakers warned that if the conflict pulls in more countries, euro zone inflation could rise just as growth starts to sag, an uncomfortable mix for investors already wary of a “higher-for-longer” rate backdrop.

Europe’s fear gauge, the STOXX volatility index, spiked to its highest level since April earlier in the week and remained elevated on Friday.

“Europe is a bit more exposed to higher oil prices and there’s some concerns that we’ll see a stagflationary environment,” said Ciaran Callaghan, head of European equity research at Amundi.

While energy stocks were set for modest weekly gains, banks absorbed most of the selling pressure, with British lenders being singled out as particularly exposed to the Middle East risk.

Even as bargain-hunters stepped in, hoping to call a bottom, the market surrendered its opening gains, snapping back to the worries that have prevailed all week. Major bourses in Frankfurt, Paris, Milan, Madrid and London were all set for their worst week since April.

“It’s a good environment for stock-picking and we haven’t really seen a lot of signs of panic,” Callaghan said. Investors will also focus on the revised reading of euro zone fourth-quarter GDP and employment data later in the day, and remarks from European Central Bank President Christine Lagarde and board member Isabel Schnabel.