European stocks suffer biggest drop in months as Middle East tensions hit banks, travel

FRANKFURT: European stocks clocked their biggest one-day decline in three months on Monday, swept up in a global sell-off in risk assets as the US-Israeli war against Iran expanded with no end in sight.

The pan-European STOXX 600 closed down 1.7 percent, at its lowest level in more than two weeks, after closing at a record high on Friday.

After a weekend bombing that killed Iran’s supreme leader Ayatollah Ali Khamenei, the country launched retaliatory attacks on US bases in Gulf states, raising fears that the conflict could widen and draw in more countries in the region.

Though the Pentagon downplayed concerns of the US plunging into an open-ended conflict, President Donald Trump said in a CNN interview that a “big wave” was yet to come in the war.

Europe’s volatility gauge, the STOXX volatility index, spiked to its highest level since mid-November.

“We expect a short, hard-hitting regional conflict, which should offer likely signals to help investors know if a larger conflict is developing,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute.

“Past violent flareups in the Middle East moved markets towards risk aversion, but sentiment rebounded quickly once it was clear that the conflict was subsiding and regional oil flow would continue.”

Banks took the biggest hit, down 3.2 percent, with heavyweights HSBC, Santander and Allianz down between 3 percent to 5 percent.

Spain’s financial-heavy index marked its steepest one-day fall since the tariff shock in April, while Germany’s saw its worst since August.

Industrials and consumer discretionary stocks such as luxury companies

fell 1 percent and 3 percent respectively, as investors priced in potential supply chain disruptions for these export-heavy companies.

The energy sector hit a record high and was the only one trading higher, tracking oil prices that jumped as much as 13 percent after Iranian attacks disrupted shipping through the vital Strait of Hormuz. European natural gas prices shot up 50 percent, after major LNG exporter QatarEnergy halted production.

Shell, BP and TotalEnergies gained between 2 percent and 3 percent.