FRANKFURT: European shares hit their lowest level in more than two months on Monday before paring some declines, as a sharp surge in oil prices exacerbated inflation fears while the US-Israeli war with Iran showed no signs of easing.
The pan-European STOXX 600 fell for a third straight session, closing down 0.6 percent, after marking its worst weekly performance in nearly a year.
The index has tumbled nearly 6 percent below its record closing high hit on February 27. Europe’s fear gauge, the STOXX volatility index, hit its highest since April, before closing lower for the day.
Iran named Mojtaba Khamenei as successor to his father, Ali Khamenei, as supreme leader - a move seen as reinforcing the grip of hardliners in Tehran, and closing paths to a swift end to the war.
Europe is heavily dependent on liquefied natural gas and imported oil, which has surged more than 25 percent to just under USD120 a barrel, leaving it particularly exposed to supply shocks. A prolonged conflict could drive energy and transport costs even higher at a time when economic growth is already fragile.
“There may potentially be further moves higher, before the eventual decline… if prices do then fall back, the global economic cycle would have a more stagflationary feel but wouldn’t be fundamentally derailed,” said Paul Diggle, chief economist at Aberdeen.
Energy stocks on the STOXX 600 were the only ones trading higher, up 1.4 percent. Real estate stocks were hit the most as concerns over reviving inflation pushed back bets on interest rate cuts, down 2.7 percent.
Central banks across Europe came under market pressure on Monday to lift interest rates, with the European Central Bank seen raising rates once by June or July. European bond yields touched their highest levels in a year.
Meanwhile, G7 countries have not yet decided whether to release emergency oil reserves as prices surge above USD119 a barrel due to the Iran war, France’s finance minister said.
Banks - at the heart of last week’s selloff - extended losses, falling 0.5 percent. Travel and leisure stocks were hit again, down 2 percent.
Among stocks, Kinnevik tumbled 17 percent to the bottom of the STOXX 600 after Ningi Research said it was short on the company.
Roche dropped 2.6 percent as the drugmaker’s oral breast cancer drug failed in a trial.
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