FRANKFURT: European shares fell on Thursday after a sharp rebound in the previous session, as the Middle East conflict showed no signs of easing and more tankers came under attack, threatening higher oil prices and a knock-on effect on the global economy.
The pan-European STOXX 600 closed 1.3 percent lower, reversing an earlier gain of as much as 0.6 percent. The index recorded its strongest session in more than three months on Wednesday.
Export-heavy industrial stocks were the biggest drag on the index, down 2.4 percent. Siemens Energy fell about 6 percent, while defence stocks Rolls-Royce and Rheinmetall fell more than 5 percent each.
The broader aerospace and defence index was down 4.2 percent, in its steepest one-day decline since April. The US-Israel war with Iran entered its sixth day. The US Senate blocked a motion aimed at halting the US air campaign and more Gulf countries were being dragged into the conflict with no end to the disruption to energy infrastructure and shipping in sight.
“It’s becoming harder to see a quick resolution to the conflict in the Middle East and that in turn is forcing markets to look again at their interest rate expectations for the coming months,” said Danni Hewson, head of financial analysis at AJ Bell.
Banks were down 1.7 percent, travel and leisure stocks fell 1.8 percent and miners dropped 3.8 percent as metal prices eased.
“It’s better to take a step back. If we don’t have a clear and abrupt end to the conflict right now, we will continue to see this volatility extend into the next weeks,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
Europe remains heavily reliant on imported oil and LNG, and tighter supply conditions due to the war could push energy and transport costs higher, at a time when growth is already tepid.
Three European Central Bank policymakers warned that euro zone inflation would likely rise, and growth sag, if the war sucks in more countries. Morgan Stanley projected the ECB will hold rates steady through 2026, pointing to the inflation risks stemming from the conflict.