European shares pause after rally as US-Iran truce shows signs of strain

European shares edged lower on Thursday, taking a breather after their strongest rally in a year, as investors grew cautious about the durability of the fragile US-Iran ceasefire and its implications on oil prices and global inflation.

The pan-European STOXX 600 index was down 0.2% at 612.06 points, as of 0715 GMT.

Regional bourses were mixed, with Germany’s DAX down 0.5%, while London’s FTSE 100 climbed 0.2%.

European markets surged on Wednesday on news of a two-week ceasefire agreement in the Middle East, sparking optimism that oil and gas shipments through the strategically crucial Strait of Hormuz might soon resume normal operations.

However, that optimism faded quickly as Israel continued military operations in Lebanon on Wednesday, prompting Iran to warn it would be “unreasonable” to pursue permanent peace negotiations under such circumstances.

Meanwhile, US President Donald Trump warned of a major escalation in fighting if Tehran failed to comply.

On STOXX 600, the industrial sector losses weighed the most, down 0.6%.

While, travel, banks and technology stocks all traded in red. On the flip side, the energy sector led the gains with 1% rise, as oil prices rose on the day.

Despite the ceasefire, oil prices remain about 40% above pre-conflict levels, raising concerns that an inflationary surge will soon be reflected in economic data.

Investors are now awaiting the release of US Personal Consumption Expenditures (PCE) data later in the day for further insights into inflation trends.

Among other movers, British American Tobacco gained about 1% after the Dunhill cigarettes maker named Dragos Constantinescu as its chief financial officer.