European equities retreat, oil climbs as US strikes in Iran delay peace hopes
The STOXX 600 and Germany’s DAX fell following new US strikes in southern Iran, while Brent crude rose 2.4%. ECB board member Isabel Schnabel warned that interest rates could rise in June regardless of a ceasefire.
European stock indexes surrendered some recent gains on Tuesday, retreating from a period of optimism as new U.S. military strikes in southern Iran dampened investor hopes for an imminent peace deal. The STOXX 600 fell 0.2 per cent, while Germany’s DAX dropped 0.5 per cent. London’s FTSE 100 bucked the regional trend, rising 0.7 per cent. The MSCI World Equity Index remained flat for the day but has gained 3.8 per cent so far this month.
Market sentiment had shifted positively over the past week as traders positioned themselves for a de-escalation in the conflict between the United States, Israel, and Iran. That war, which began in late February, has severely disrupted Middle East oil and gas supplies. However, that outlook was reversed after the U.S. announced it had carried out what it termed defensive strikes in southern Iran on Monday.
U.S. Secretary of State Marco Rubio indicated that diplomatic efforts would require time, stating that negotiating a deal with Iran could take several days. This comment followed remarks from U.S. President Donald Trump on Monday, who said he had urged additional countries to sign the Abraham Accords as part of his efforts to negotiate an end to the war.
Peter Schaffrik, global macro strategist at RBC Capital Markets, noted that uncertainty in the Middle East was weighing on markets. He observed that the narrative had swung rapidly from expectations of a near-term agreement to renewed bombing, leaving the situation unclear. Despite the volatility, Schaffrik said underlying optimism remained, with traders holding out hope that the Strait of Hormuz could soon reopen to traffic.
Oil prices rose in response to the renewed hostilities. Brent crude futures climbed 2.4 per cent to $98.50 a barrel. U.S. West Texas Intermediate was down 4.7 per cent from Friday’s close at $92.04, though there was no WTI settlement on Monday due to the U.S. Memorial Day holiday. Brent has fallen significantly from its late April peak above $120 a barrel.
European traders were also weighing comments from European Central Bank board member Isabel Schnabel, who told Reuters that the central bank should raise interest rates in June even if ongoing peace talks with Iran yield a deal. Schnabel cited the conflict’s longer-than-projected duration and high energy prices spilling into the broader economy as key factors. Money market traders are pricing in about a 90 per cent chance of a hike at the ECB’s June meeting.
European bond yields rose following the U.S. strikes, but the benchmark 10-year German yield remained close to its lowest in almost seven weeks at 2.9642 per cent. Yields had fallen last week as investors became less concerned about the war’s impact on inflation and growth. Meanwhile, U.S. government bonds rallied as investors remained hopeful about a deal to reopen the Strait of Hormuz.
The U.S. dollar was steady, with the dollar index at 99.026 and the euro flat on the day at $1.1642. The dollar was up 0.1 per cent against the Japanese yen at 159.12 yen. Gold was down around 0.8 per cent on the day at $4,534.86. Wall Street futures pointed to more gains for stocks in the U.S. session, with S&P 500 e-minis up 0.7 per cent and Nasdaq e-minis up 1.1 per cent.
