(Sharecast News) - European shares plunged on Wednesday and oil prices surged after US president Donald Trump declared the fragile truce with Iran "over" following an exchange of missile strikes between the two countries.
The pan-European Stoxx 600 fell 1.76% to 634.91.
Germany's DAX dropped 2.35% to 24,865.67, France's CAC 40 declined 2.18% to 8,252.66, and London's FTSE 100 lost 1.66% to 10,489.04.
In commodities, Brent crude futures were last up 7.54% on ICE at $79.75 per barrel, while the NYMEX quote for West Texas Intermediate rose 7.1% to $75.44.
Chris Beauchamp, chief market analyst at IG, said the recent strong run for European equities had been dealt a blow.
"The looming resumption of war between the US and Iran, or at least a fresh blockade of the latter, has driven a wave of selling in European markets that are heavily exposed to higher energy costs," he said.
"The DAX has reversed all its gains from last week, while the FTSE 100's push towards 11,000 has once again been rudely interrupted."
Oil prices rocketed after Trump said the 60-day memorandum of understanding with Tehran was "over".
The US said on Tuesday that it had launched "a series of powerful" strikes against Iran after three oil tankers were attacked in the Strait of Hormuz.
Speaking at the Nato summit in Turkey, Trump said he no longer wanted to deal with Tehran, calling Iranian officials "vicious" and "violent" and saying talks were a "waste of time".
The Trump administration also revoked a waiver that had allowed Iran to sell oil under the interim peace arrangement.
Patrick Munnelly, market strategy partner at TickMill, said London had sold off sharply after Trump's comments reignited fears of a fresh escalation in the Middle East.
"The FTSE 100 fell more than 1%, dropping to its lowest level in nearly a week, while the FTSE 250 touched its lowest level in more than a week as rising oil prices and higher bond yields revived concerns about inflation and central-bank tightening," he said.
"The move was broad and risk-off."
Munnelly said the market reaction showed how quickly the post-truce relief trade could reverse when geopolitical headlines shifted.
"Investors had only recently started to price a lower probability of disruption around the Strait of Hormuz," he said.
"Trump's comments forced the market to rebuild that risk premium."
Tensions at the Nato summit also extended to Spain, with Trump saying the US would cut off trade with Madrid after criticising the country's refusal to commit to Nato's new target of spending 5% of GDP on defence by 2035.
He called Spain a "terrible partner" and said he had ordered Treasury secretary Scott Bessent to cut trade with the country.
Nato general secretary Mark Rutte acknowledged that there were still issues to resolve regarding Spain, while noting that the country's defence spending had risen to 2.1% of GDP last year from 1.4% in 2021.
Reuters reported that the Spanish prime minister's office said bilateral relations with the US were beneficial to both countries in trade and defence.
IMF trims global growth forecasts, upgrades UK
On the economic front, the International Monetary Fund trimmed its global growth forecast but upgraded its outlook for the UK.
In its July World Economic Outlook, the IMF said it now expects global growth of 3.0% this year, down from its April forecast of 3.1% and below the 3.5% average seen in 2024 and 2025.
The IMF said the modest slowdown reflected the impact of the Middle East war being partly offset by stronger demand linked to the global technology cycle and the adoption of artificial intelligence.
It said the effect varied by country, with energy exporters outside the conflict zone benefiting from improved terms of trade, while economies exposed to the technology upturn were seeing stronger activity.
Global headline inflation is now expected to rise to 4.7% in 2026 from 4.1% a year earlier, before falling to 3.9%.
The IMF said the projections, which were slightly higher than in April, suggested the disinflation trend that began in early 2024 had stalled.
It left its US growth forecast unchanged at 2.3% for this year, while trimming its eurozone forecast to 0.9% from 1.1%.
It forecast Chinese growth of 4.6% in 2026, compared with 4.4% in April, and lifted its UK growth forecast to 1.0% from 0.8%.
The UK forecast for 2027 was unchanged at 1.3%.
Barret Kupelian, chief economist at PwC UK, said the global economy had absorbed the energy shock better than expected, helped by inventories, stockpiling and the AI boom.
However, he said the UK remained exposed to more volatile inflation as a net energy importer, meaning businesses needed more certainty before investing.
Oil majors in the green, airlines tumble
In equity markets, oil majors benefited from the surge in crude prices.
Aker BP rose 3.15%, Equinor gained 3.06%, Repsol advanced 5.13%, Vr Energi added 3.54%, BP climbed 3.53%, and Galp Energia was up 4.2%.
Airlines and travel stocks fell on the risk of higher fuel costs as Middle East tensions flared again.
IAG dropped 3.03%, Wizz Air lost 4.97%, Deutsche Lufthansa fell 6.51%, Air France-KLM declined 6.55%, and TUI was down 2.15%.
Reporting by Josh White for Sharecast.com.
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