(Sharecast News) - European equity markets rallied on Monday, shrugging off a sharp surge in oil prices driven by escalating tensions in the Middle East, as investors focused on resilience in risk appetite despite mounting geopolitical risks, although sentiment remained fragile.
The pan-European Stoxx 600 rose 0.94% to 580.73, with Germany's DAX gaining 1.18% to 22,562.88 and France's CAC 40 up 0.92% at 7,772.45.
London's FTSE 100 outperformed, climbing 1.61% to 10,127.96.
"At this point it is impossible to know whether the negotiations between the US and Iran are actually occurring in some way or are merely figments of Trump's imagination," commented As Chris Beauchamp, chief market analyst at IG.
"At any rate, the market impact of his interventions gets weaker, as we saw today.
"The brief bounce in stocks has rapidly fizzled out - until investors are treated to the sight of senior US officials physically getting on a plane to Pakistan to negotiate, investors will become more sceptical."
Energy markets remained volatile, with Brent crude rising 0.5% to $113.13 a barrel and West Texas Intermediate jumping 4.04% to $103.67, after earlier spiking above $116 amid heightened geopolitical concerns.
Beauchamp added that "the script of the past month is still in place. Higher oil prices mean losses for equity markets.
"Everything else is secondary. Oil's response has been much more muted than many had expected, but once the buffers of afloat storage are used up and shortages become commonplace, we can expect a much more dramatic move."
Oil prices surged at the open after US president Donald Trump threatened to seize Iran's oil assets, raising fears of direct American military involvement.
Brent briefly topped $116 a barrel, extending a record monthly gain of 59%, as attacks across the Gulf intensified and Yemen's Houthi movement launched missile strikes on Israel.
The escalation heightened concerns that Tehran-backed forces could disrupt shipping through the Bab el-Mandeb in the Red Sea, a key oil transit route alongside the Strait of Hormuz.
Sentiment was further tested by Trump's remarks that his "preference would be to take the oil" in Iran, including the potential seizure of export infrastructure on Kharg Island. He likened the scenario to the US removal of Venezuela's former leader Nicolas Maduro and the subsequent annexation of the country's oil industry, comments that reinforced fears of a prolonged and widening conflict.
Euro area sentiment deteriorates
Economic data painted a more cautious backdrop.
Eurozone business and consumer sentiment deteriorated in March, with the European Commission's economic sentiment indicator falling to 96.6 from 98.2, below expectations.
Selling price expectations in industry surged to 19.7, the highest since February 2023, reflecting mounting inflation pressures linked to higher energy costs.
Bert Colijn, chief economist for the Netherlands at ING, said the decline was "mainly felt among consumers and retailers," adding that while output has yet to be materially affected, "expectations for the months ahead did decline," signalling growing concern over the war's economic impact.
In Germany, inflation accelerated sharply, with harmonised consumer prices rising 2.8% year-on-year in March from 2%, driven by a 7.2% jump in energy prices.
Core inflation held steady at 2.5%, while food prices rose 0.9%.
Carsten Brzeski, global head of macro at ING, said the increase was unsurprising given that "both energy prices and uncertainty remain high," warning that sustained elevated fuel costs could erode household purchasing power more than during the 2022 energy shock.
He added that while markets have begun pricing in up to four rate hikes this year, such expectations may be premature unless inflation pressures broaden beyond energy.
In the UK, mortgage approvals rebounded in February, rising to 62,584 from 60,246 and exceeding expectations of 61,300, according to the Bank of England.
Net mortgage borrowing increased to 4.8bn, while the effective interest rate on new mortgages edged up to 4.1%.
Matt Swannell, chief economic adviser to the EY Item Club, said the rebound likely reflected "an unwinding of past weakness," cautioning that rising swap rates and expectations of tighter monetary policy could cool housing demand in the months ahead.
Alternative energy stocks rise, Delivery Hero in the red
In equities, Norsk Hydro surged 9.53% and Orsted gained 7.03%, as investors rotated into alternative energy stocks amid elevated fossil fuel prices.
On the downside, Delivery Hero fell 1.84% following reports that major shareholder Prosus was seeking to offload a 10% stake in the company.
Reporting by Josh White for Sharecast.com.
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