Europe close: Shares slump as Iran conflict escalates

(Sharecast News) - European shares slumped on Tuesday as Israel and the US pressed ahead with renewed attacks on Tehran and neighbouring Beirut, fuelling fears of a broader regional conflict and sending oil and gas prices sharply higher.

The pan-European Stoxx 600 fell 3.08% to 604.44, while Germany's DAX dropped 3.44% to 23,790.65 and France's CAC 40 declined 3.46% to 8,103.84.

London's FTSE 100 lost 2.75% to 10,484.13.

"Stock markets drop sharply as escalation in the Middle East worsens the global economic outlook," said Axel Rudolph, chief technical analyst at IG.

"Monday's relatively muted reaction to the Middle East conflict across US equity markets gave way to sharp selling on Tuesday as the situation escalated. Several global indices have seen drops akin to April 2025, some hitting year-to-date lows amid growth concerns."

AJ Bell investment director Russ Mould noted that "fear was the watchword on Tuesday" as the FTSE 100 recorded its biggest one-day fall since US president Trump's so-called 'Liberation Day' tariffs in April last year.

"Investor worries about the situation in the Middle East are mounting and there is a sense the conflict is at risk of spiralling," he said.

"In particular there is concern about the impact a surge in energy prices might have on inflation and, in turn, global interest rates."

Tankers remained stranded on either side of the Strait of Hormuz after Iran's Revolutionary Guard warned that any vessel would be fired upon, while a drone strike temporarily halted production at Saudi Arabia's largest facility, intensifying concerns about supply disruption.

"European natural gas futures surged nearly 40% to above �60 per megawatt-hour - their highest level since 2023 - following a prior 35% jump, as escalating Middle East tensions raised fears over LNG supply," Rudolph said.

"Iranian drone strikes on key infrastructure and the de facto closure of the Strait of Hormuz, constraining broader regional exports, also led to another 8% rise in the oil price this week with Brent crude rallying to $84 per barrel."

Inflation unexpectedly accelerates in the euro area

Economic data added to the uncertainty.

Eurozone inflation unexpectedly accelerated in February, with Eurostat reporting that the annual consumer price index rose 1.9%, up from 1.7% in January and above expectations for no change, though still below the European Central Bank's 2% target.

Service-sector inflation climbed to 3.4% from 3.2%, food, alcohol and tobacco inflation held at 2.6%, and non-energy industrial goods inflation increased to 0.7% from 0.4%.

Energy price deflation eased to -3.2% from -4.0%.

Core inflation, which strips out energy, food, alcohol and tobacco, rose to 2.4% from 2.2%.

Among member states, inflation was highest in Slovakia at 4.0%, followed by Croatia at 3.9% and Spain at 2.5%, while Cyprus recorded 0.9%, France 1.1% and Belgium 1.4%.

Rudolph said "rebounding euro area inflation and Japan's jobless rate hitting one-and-a-half-year highs didn't help either.

"In the UK yields jumped as markets scaled back on Bank of England rate cut expectations for March."

In the UK, chancellor Rachel Reeves defended her economic strategy as the Office for Budget Responsibility trimmed its 2026 growth forecast to 1.1% from 1.4% previously, while raising projections for 2027 and 2028 to 1.6% from 1.5%.

Reeves told MPs that "this government has the right economic plan for this country" and that it was "even more important in a world that in the last few days has become even more uncertain".

She confirmed regular contact with the Bank of England governor and said she would meet North Sea leaders to discuss the crisis.

The OBR now expected inflation to fall faster than previously forecast and said fiscal headroom had risen to �23.6bn from �21.7bn, though unemployment was projected to peak at 5.3% this year versus 4.9% previously.

It warned of "significant risks" around its forecast, citing Middle East conflict and trade policy developments.

Oil and gas price spikes pushed gilt yields higher as investors pared back rate cut expectations.

"Meanwhile the Spring Statement, largely a non-event with chancellor Rachel Reeves delivering no surprises, was completely overshadowed by events thousands of miles away," Mould said.

Separate data showed UK shop price inflation easing more than expected in February.

The BRC-NIQ shop price monitor reported annual growth of 1.1%, down from 1.5% in January and below forecasts of 1.2%.

Food inflation slowed to 3.5% from 3.9%, while non-food prices fell 0.1%, reversing a 0.3% rise in January.

Fresh food inflation edged down to 4.3% from 4.4%, and ambient food inflation dropped to 2.3% from 3.1%.

Helen Dickinson of the British Retail Consortium said fierce competition and falling global food costs had kept price rises in check, while NIQ's Mike Watkins noted that competitive pricing was helping ease cost-of-living pressures despite unpredictable demand.

Energy stocks among the only gainers, Beiersdorf slumps

In equities, energy stocks were among the few gainers as crude prices extended Monday's rally, with Equinor up 1.38%, Repsol rising 3.29% and BP adding 0.11%.

Mould noted that "heading into the close there were few hiding places, with just two names in the index in positive territory including oil giant BP."

He also cautioned that "despite the turmoil, traditional safe haven gold has slipped thanks to an increase in the US dollar as investors bet an inflationary spike might necessitate higher rates across the Atlantic".

"This, plus a fall in other metal prices, has seen the FTSE 100's mining contingent firmly on the back foot."

On the downside, Beiersdorf slumped 20.13% after the German manufacturer forecast lower net sales and margins for 2026.

Thales fell 2.46% despite reporting orders matching a record �25.3bn set in 2024, with sales up 7.6% to �22.1bn and net profit rising 6% to �2bn, supported by its aerospace and defence divisions and 28 large orders worth �7.75bn in 2025.

Inchcape dropped 9.25% after warning that 2026 volumes would be at the lower end of forecasts due to weakness in the premium Asia market.

Intertek Group tumbled 14.5% even as it forecast further earnings growth following higher annual sales and profits.

Aberdeen Group slid 9.09% after saying full-year 2025 operating profit would meet market expectations and assets under management rose 9% to �556bn.

Citi analysts pointed to delayed recovery in adviser flows until 2027 and guidance for 5% to 10% annual growth in net capital generation that they described as well below consensus.

Reporting by Josh White for Sharecast.com.