(Sharecast News) - European equity markets rallied on Wednesday as investors responded positively to signs of a potential de-escalation in the US-Iran conflict, after US president Donald Trump proposed a 15-point "peace plan", despite it being dismissed by Tehran.
Reports that talks between the two sides could take place in Pakistan as early as this weekend further supported sentiment.
As AJ Bell's Dan Coatsworth noted, "investors are pinning their hopes on a 15-point ceasefire deal unveiled by the US despite the proposals apparently being rebuffed by Iran," although he cautioned that "the picture remains murky and financial markets are still edgy despite the dramatic turnaround in rhetoric we've seen so far this week."
The pan-European Stoxx 600 rose 1.42% to 587.49, with Germany's DAX gaining 1.41% to 22,957.08 and France's CAC 40 advancing 1.33%.
London's FTSE 100 climbed 1.42% to 10,106.84.
Chris Beauchamp at IG said "while indices may have continued to bounce back from Monday's low, the highs of a week ago are still to be tested," adding that "this rally doesn't have the feel of April 2025's tariff pause bounce, which kicked off an eight-month surge."
He added that "instead investors remain cautious, since it is far from clear any ceasefire talks will take place, let alone whether they will lead to any deal."
Oil prices eased as geopolitical tensions showed tentative signs of cooling, with Brent crude futures last down 2.64% on ICE at $101.73 per barrel, and the NYMEX quote for West Texas Intermediate down 2.05% to $90.46.
However, Coatsworth warned that "reports of fresh strikes on its Bushehr power plant are all helping to push oil prices back above the $100 per barrel mark - which really gets market alarm bells ringing."
International Atomic Energy Agency director general Rafael Grossi told Italy's Corriere della Sera that negotiations between the US and Iran could begin this weekend in Islamabad, potentially extending beyond nuclear issues to include missiles, regional militias and security guarantees.
He said a temporary agreement on nuclear matters was possible, adding: "Military pressure has its effects, but Iran still possesses all the capabilities. The nuclear material is still there."
Beauchamp struck a similarly cautious tone, noting that "Iran doesn't sound like it is desperate for a deal, despite president Trump's comments to the contrary."
Lagarde talks of 'case for action', German business sentiment deteriorates
On the economic front, European Central Bank president Christine Lagarde warned that the inflationary shock stemming from the conflict has strengthened the "case for action", as policymakers grapple with heightened uncertainty.
Speaking in Frankfurt, she said: "None of us can resolve the uncertainty about how the war in Iran will play out. But what I can do is set out how we will approach this shock," adding that persistent deviations from the inflation target would require "forceful monetary policy action".
However, she stressed it was too early to determine the scale or duration of the impact and reaffirmed the ECB's commitment to returning inflation to 2% over the medium term.
In Germany, business sentiment deteriorated in March, with the Ifo Institute's business climate index falling to 86.4 from 88.4, although slightly above expectations of 86.1.
The expectations index dropped to 86.0 from 90.2, while the manufacturing, services, trade and construction gauges all weakened.
Ifo president Clemens Fuest said: "Uncertainty among companies has increased noticeably. The war in Iran has put any hope of a recovery on ice for the time being."
ING's Carsten Brzeski added that the conflict, rising energy prices and renewed uncertainty had "blasted away optimism".
In the UK, inflation held steady at 3% in February, in line with forecasts, while core CPI edged up to 3.2% from 3.1%.
The Office for National Statistics said clothing prices provided the largest upward contribution, offset by lower petrol costs and promotional activity in alcohol.
However, economists warned that the impact of higher energy prices linked to the Middle East conflict was likely to push inflation higher in the coming months.
ING's James Smith said markets were overpricing the likelihood of rate hikes, while EY Item Club's Matt Swannell said headline inflation could exceed 4% in the second half of 2026 before easing in 2027.
Separate ONS data showed UK house price growth slowed to a 16-month low of 1.3% in January, with average prices at 268,000, while rental growth held at 3.5%, the weakest rate since March 2022.
Regional disparities persisted, with price declines deepening in London and the wider South, while northern regions continued to see stronger growth.
In the US, mortgage applications fell 10.5% in the week to 20 March, following a 10.9% decline the previous week, as the average 30-year fixed mortgage rate rose to a five-month high of 6.43%.
The Mortgage Bankers Association said higher borrowing costs and economic uncertainty, exacerbated by the conflict and elevated Treasury yields, were weighing on demand.
Lanxess jumps after upgrade, airlines ascend on ceasefire hopes
On the equities front, Germany's Lanxess surged 17.35% after an upgrade from JP Morgan.
Airline stocks gained on hopes of a ceasefire, with Deutsche Lufthansa up 2.26%, Air France-KLM rising 2.25% and IAG adding 1.4%, as Coatsworth said "for now, equity investors seem minded to look for the positives and hope that some kind of off-ramp can be found to allow the Strait of Hormuz to be reopened and end the substantial disruption to energy supplies."
In London, "a mix of utilities, miners, housebuilders and industrial names were helping to power the index forward, while software and data names continued to fall out of favour amid ongoing concerns about AI-driven disruption," he added.
On the downside, RS Group fell 4.52% after warning of weaker revenues amid challenging market conditions and tariff impacts, particularly in Mexico.
Reporting by Josh White for Sharecast.com.
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