European stock markets fell on Thursday as investors reassessed the risk of the Middle East war potentially lasting longer, with rising oil prices once again adding inflationary pressures that suppressed risk appetite. The pan-European STOXX 600 index fell by about 0.4% during trading, with bank stocks leading the decline as markets began to lower expectations of rate cuts in Europe and the US this year.
The direct cause of the weakened market sentiment was the fire on an oil tanker in Iraqi waters and renewed risk in the Strait of Hormuz transport route. Reuters reported that Brent crude oil briefly surpassed $100 per barrel, adding greater pressure to the European market, which heavily relies on energy imports.
Mizuho's fixed income and forex analysts stated that the baseline assumption remains an oil price increase and rising inflation. They recommend maintaining dollar long positions and betting on rising yields for UK, Euro, and US bonds. However, they listed five developments that could reverse this trading logic, including a marked weakening of Iran's attack capabilities, Trump announcing the end of actions, the US accepting the new Iranian regime and shifting to diplomacy, external military forces reopening the Strait of Hormuz, and market momentum faltering if oil prices rise above $150.
On the trading floor, the European banking sector fell by 2.2%, underperforming the broader market, reflecting investors' increased caution about earnings sustainability and asset quality in a highly volatile environment. The market is now trading on more than just the war itself; it is considering how the shock of high oil prices might reshape inflation and interest rate pathways.
