FRANKFURT: European shares ended a three-day winning streak on Thursday as hopes of an imminent de-escalation in the Middle East conflict faded, prompting traders to reassess their interest rate expectations.
The pan-European STOXX 600 index fell 1.2 percent to 580.59 points, with miners and defence shares among the biggest laggards.
A senior Iranian official told Reuters that the US proposal for ending the war was “one-sided and unfair.”
The share moves this week suggest equities could remain under pressure as long as the war, now in its fourth week, grinds on. Hopes for a swift end to the conflict have proven premature so far, and investors doubt if even a ceasefire would immediately restore energy flows to pre-war levels.
Europe is particularly vulnerable to surging crude prices as the Strait of Hormuz remains shut, fanning inflationary and growth concerns.
ECB policymaker Joachim Nagel told Reuters that an April rate hike was “an option,” a day after President Christine Lagarde said the central bank was prepared to act at any meeting to keep inflation at its 2 percent target.
Short-term European bond yields rose and pressured equities, while interest rate futures reflected a 71 percent chance of a rate hike in April, according to LSEG-compiled data.
Industrials and banks, cyclical sectors vulnerable to economic downturns, were down about 2 percent each.
“There’s a challenge for investors today, which is to try and understand the duration of the conflict and the ultimate goal that could drive an off-ramp or a resolution,” said Craig Cameron, portfolio manager at Templeton Global Equity Group.
“The prospect of a fresh escalation is still top of mind for investors,” Deutsche Bank analysts wrote.
The STOXX index is down 8.4 percent since the war started and is on the cusp of confirming a correction. An index is said to have corrected if it drops 10 percent from a record close.
“Higher rates are definitely going to weigh on stocks and that’s been part of that decision factor that we’ve seen over in recent weeks,” Cameron added.
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