Europe close: Stocks head south as oil prices jump higher

(Sharecast News) - European equities reversed earlier gains to close lower on Wednesday, as escalating tensions in the Middle East drove a surge in oil prices and heightened investor caution ahead of the US Federal Reserve's policy decision later in the day.

The pan-European Stoxx 600 fell 0.8% to 598.25, with Germany's DAX down 0.86%% at 23,527.63, France's CAC 40 slipping 0.02% to 7,974.36, and London's FTSE 100 declining 0.94% to 10,305.29.

"The tentative recovery in equities so far this week has been dealt a major blow as news of attacks on Iran's gas infrastructure comes through," said Chris Beauchamp, chief market analyst at IG.

"The rally had always been precarious given tonight's Fed decision, but the market really doesn't like seeing energy infrastructure directly targeted."

Markets had initially traded higher, supported by reports that Iraqi crude exports had resumed via Turkey's Ceyhan port after output had dropped by nearly 66% to around 1.4 million barrels per day amid the US-Israel war on Iran.

However, as Danni Hewson, AJ Bell's head of financial analysis, said, "having stabilised somewhat in recent days the FTSE 100 was back under the cosh on Wednesday afternoon, while US shares were also lower following the latest developments in the Middle East."

Sentiment deteriorated through the session after Iran warned that energy infrastructure across the Persian Gulf could become "legitimate targets" following Israel's attack on the South Pars gas field.

According to Bloomberg, citing Iran's semi-official Tasnim news agency, facilities in Qatar, Saudi Arabia and the United Arab Emirates were at risk of imminent missile strikes, including Saudi Arabia's SAMREF refinery and Jubail petrochemical complex, the UAE's Al Hosn gasfield, and Qatar's Ras Laffan refinery and Mesaieed petrochemical complex.

Hewson added that "Iranian threats of retaliation against regional energy infrastructure after Israeli strikes on its massive South Pars gas field have helped dial up the temperature once again and put renewed upward pressure on oil prices.

"Any solution to the blockage of the Strait of Hormuz looks pretty distant at this point and unless and until there is progress on that front, energy markets will likely remain volatile."

Oil prices surged on the heightened supply risk, with Brent crude futures up 4.82% on ICE at $108.40 a barrel and the NYMEX quote for West Texas Intermediate gaining 1.81% to $97.95, reinforcing concerns over inflation and global growth.

Beauchamp said, "Anxious traders now wait to see how Iran will respond to this fresh escalation, but with oil prices heading higher again a retest of the recent lows seems to be on the cards," while also noting that "oil prices are surging again and this afternoon's developments have pushed investors to the dollar.

"The US currency remains the only real safe haven, with the yen out of favour thanks to the policy outlook and Japan's dependence on imported oil."

Eurozone inflation edges higher in February

On the macroeconomic front, final data confirmed eurozone inflation edged higher in February, with the harmonised index of consumer prices rising 1.9% year-on-year, up from 1.7% in January but remaining below the European Central Bank's 2% target for a second consecutive month.

Core inflation, which excludes food, alcohol, tobacco and energy, rose to 2.4% from 2.2%, in line with expectations.

Services inflation moderated to 3.4%, while non-energy industrial goods inflation picked up to 0.7% and energy price deflation eased to -3.1%.

Elsewhere, Switzerland downgraded its 2026 growth forecast to 1.0% from 1.1%, citing heightened uncertainty linked to the Middle East conflict and a sharp rise in energy prices, while maintaining its 2027 projection at 1.7%.

The government's Expert Group warned that oil prices had surged from around $70 a barrel at the end of February to above $100, partly due to disruptions and safety risks in the Strait of Hormuz, and raised its inflation forecast for 2026 to 0.4%.

In the United States, producer prices rose more than expected in February, with headline PPI up 0.7% month-on-month and core PPI increasing 0.5%, both exceeding forecasts of 0.3%.

Annual PPI inflation accelerated to 3.4%, its highest level since February 2025.

Hewson said, "concerns about renewed inflationary pressure were only exacerbated by the latest factory gate prices from the US.

"Often this reading is a canary in the coal mine for consumer prices as manufacturers pass on their increased costs, and the substantially higher-than-expected number inevitably saw markets sit up and take notice."

She added that the uplift in producers' prices, covering a period before the energy shock unleashed by the conflict in the Middle East, would also have been noted by the Federal Reserve ahead of its meeting later.

"The Fed is widely anticipated to sit on its hands this time around, but investors will be looking for any clues about the future trajectory of interest rates and whether rate hikes are now a genuine prospect."

Separate data showed factory orders edged up 0.1% in January to $620.1bn, while mortgage applications fell 10.9% week-on-week as borrowing costs rose, with the average 30-year fixed mortgage rate climbing to 6.30%.

Diploma surges, Bollore in the green on special dividend

In equities, Diploma surged 17.96% after the UK technical products distributor raised its fiscal 2026 guidance.

"It takes a particularly special set of results to fire a share price to double-digit gains, and that's just what Diploma delivered on Wednesday," Hewson commented.

"Distribution isn't exactly the flashiest industry to operate in but it's extremely important to the day-to-day running of countless companies across the globe and these numbers couldn't fail to excite.

"Diploma's focus on really specialist and highly technical kit makes this even more the case and the company is clearly in expansion mode - driven by the aerospace sector in particular."

Elsewhere, Bollor� gained 11.63% as the French conglomerate reported full-year results and announced a special dividend, while Softcat advanced 9.22% after delivering an "exceptional" half-year performance and upgrading its full-year outlook.

Reporting by Josh White for Sharecast.com.