(Sharecast News) - European equity markets held modest gains on Tuesday, with early optimism over potential US-Iran peace talks fading as investors digested weaker economic data and renewed concerns over stagflation linked to rising energy prices and supply chain disruption.
As Axel Rudolph, chief technical analyst at IG, put it: "Following Monday's extreme volatility, markets have markedly calmed down as investors await the next developments".
The pan-European Stoxx 600 rose 0.43% to 579.28.
London's FTSE 100 outperformed, gaining 0.72% to 9,965.16, while France's CAC 40 added 0.23% to 7,743.92.
Germany's DAX slipped 0.08% to 22,636.91, lagging peers as sentiment cooled.
The session followed volatile trading on Monday, when US president Donald Trump threatened to bomb Iranian power plants if the Strait of Hormuz was not reopened before later claiming he had held "very good" talks with Tehran, prompting a sharp rally in equities and a pullback in oil prices.
"A string of economic surveys demonstrating the Iran conflict is already rattling the cage of the global economy and further strikes from both sides are testing investor optimism about a resolution to the crisis," said AJ Bell head of markets Dan Coatsworth.
"However, after a shaky start on Wall Street, US markets recovered some poise, with European indices taking their cue from this upwards move.
"Helping to boost the mood was a post on X from Pakistan's prime minister Shehbaz Sharif suggesting his country is 'ready and honoured' to host negotiations between the US and Iran - with Trump sharing the post on his Truth Social platform.
"Reports that Tehran is willing to listen to overtures from Washington about ending the war also helped.
"This doesn't mean talks are imminent, but investors are in the mood to seize on anything that hints at a way out of the current impasse and, in particular, a path to getting oil and gas flowing through the Strait of Hormuz again.
"But markets will need to see clear evidence of moves towards de-escalation or patience may reach breaking point."
Crude prices rebounded on Tuesday, reflecting persistent uncertainty around the Middle East conflict.
Brent crude futures were last up 4.32% on ICE at $104.26 per barrel, while the NYMEX quote for West Texas Intermediate climbed 5.13% to $92.65, underpinning gains in energy stocks.
Rudolph noted that "Brent crude rose to around $100 a barrel, recovering part of the prior session's sharp drop, as volatile trading persisted amid heightened Middle East tensions, growing risks of wider regional involvement and ongoing uncertainty over the Strait of Hormuz.
"The greenback climbed amid fading hopes of Fed rate cuts as the ongoing war in the Middle East and limited progress on de-escalation supported safe haven demand for the US currency."
Data suggests sharp slowdown in euro area growth
Economic data pointed to a sharp slowdown in eurozone growth alongside intensifying price pressures.
The flash S&P Global eurozone PMI composite output index fell to 50.5 in March from 51.9 in January, marking a 10-month low and missing expectations for 51.
Services activity weakened notably, with the business activity index dropping to 50.1 from 51.9, while manufacturing showed relative resilience, with output at 51.7 and the manufacturing PMI rising to a 45-month high of 51.4.
Germany's composite PMI fell 1.3 points to 51.9.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the data was "ringing stagflation alarm bells" as firms faced the fastest cost increases in over three years amid surging energy prices and supply chain disruption.
"Supplier delays have jumped to their highest since mid-2022, largely linked to shipping issues," he said, adding that the outlook depends heavily on the duration of the conflict and its impact on energy markets.
ING's Bert Colijn said the war had "put paid to hopes of short-term growth acceleration," highlighting vulnerabilities in energy-intensive industries and weakening consumer confidence as fuel prices rise, weighing on household spending despite solid wage growth.
In the UK, business activity also slowed sharply.
The flash composite PMI fell to 51.0 in March from 53.7, below expectations of 52.8 and marking the slowest expansion since September.
Manufacturing output dropped to 50.1 from 52.5, while services activity eased to 51.2 from 53.9.
Williamson said the conflict had "stalled growth while driving inflation sharply higher," with companies citing lost business, rising costs and supply chain disruptions.
PwC economist Jake Finney described the situation as a "conundrum" for the Bank of England, as higher prices weigh on demand while reducing the likelihood of near-term rate cuts.
Separately, UK retail sales deteriorated further, with the Confederation of British Industry reporting its sales volume balance fell to -52 in March from -43 in February, the weakest reading since April 2020.
Expected sales for April also declined to -49 from -17.
CBI principal economist Martin Sartorius said "momentum in the retail sector remained poor," with weak economic conditions and rising costs continuing to weigh on consumer spending.
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Energy majors tracked oil prices higher, with BP up 3.32%, Shell gaining 2.68%, TotalEnergies rising 1.89% and Eni adding 2.0%.
"The UK's outsized exposure to the energy sector was good news again today and gave the FTSE 100 fuel to pull ahead of the market pack, with BP and Shell both materially higher in afternoon trading," Coatsworth noted.
On the downside, Bellway slumped 14.64% after the UK housebuilder reported lower interim profits.
Reporting by Josh White for Sharecast.com.
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