(Sharecast News) - European equity markets fell sharply on Thursday as escalating conflict between the United States and Israel, and Iran, triggered a fresh surge in energy prices and heightened fears over inflation and global growth.
The pan-European Stoxx 600 dropped 2.37% to 583.73, with Germany's DAX falling 2.76% to 22,852.48, France's CAC 40 declining 2.03% to 7,807.87 and London's FTSE 100 losing 2.35% to 10,063.50.
"Trump's Iran war continues to deliver consequences in spades for global markets," said Chris Beauchamp, chief market analyst at IG.
"Brent crude has rocketed further today, putting severe pressure on European indices.
"All thought of longer-term value has been cast aside as investors rush for the exits, with the point hammered home by gloomy prognostications from the BoE and ECB."
The sell-off came as geopolitical tensions intensified following Israeli strikes on Iran's South Pars gas field and retaliatory attacks by Tehran on energy infrastructure across the Gulf.
Patrick Munnelly, market strategy partner at TickMill, said "London's major indexes plummeted on Thursday as escalating tensions in the Middle East dampened risk appetite."
Oil prices extended gains as supply risks mounted, with Brent crude futures last up 2.57% on ICE at $110.14 per barrel, and the NYMEX quote for West Texas Intermediate climbing 1.54% to $97.80.
Iran's Revolutionary Guard threatened further strikes on facilities in Saudi Arabia, the UAE and Qatar, while Qatar's Ras Laffan liquefied natural gas terminal suffered "extensive further damage" and Kuwait's Mina Al-Ahmadi refinery was hit by drones.
US president Donald Trump warned that any further Iranian attacks on Qatari energy assets would prompt a major escalation targeting the South Pars field.
Central banks strike cautious tone, eurozone construction output contracts
Central banks across Europe struck a cautious tone as the conflict clouded the economic outlook.
The European Central Bank left interest rates unchanged at 2% and warned that the war had made the outlook "significantly" more uncertain, citing upside risks to inflation from higher energy prices and downside risks to growth.
It raised its inflation forecasts to 2.6% for 2026, 2.0% for 2027 and 2.1% for 2028, while cutting growth projections to 0.9% in 2026, 1.3% in 2027 and 1.4% in 2028.
The Bank of England also held rates at 3.75% in a unanimous decision, signalling it "stands ready" to respond to any inflation spike as energy costs rise.
Policymakers said they now expected inflation to approach 3.5% in March, reflecting what they described as a new shock from higher commodity prices.
Munnelly said the decision "marked a sharp departure from just weeks earlier when a 25 basis point rate cut seemed almost certain," adding that "the ongoing turmoil in the Middle East has reshaped the economic outlook, with surging energy prices poised to unleash a new wave of inflationary pressure on the UK economy."
He added that "amid the heightened uncertainty surrounding the conflict's duration and economic impact, all nine members of the Monetary Policy Committee (MPC) unanimously agreed to maintain the current rate," and noted that "in a noteworthy shift, the MPC omitted any reference to potential rate cuts from its meeting minutes, signaling a significant change in its stance."
The Swiss National Bank kept its benchmark rate at 0%, highlighting increased willingness to intervene in currency markets as safe-haven flows lifted the franc, while Sweden's Riksbank left its policy rate unchanged at 1.75%, citing uncertainty over the war's impact.
Economic data added to the cautious backdrop.
Eurozone construction output fell 0.1% month-on-month in January, with annual output down 1.9%, the steepest decline since October 2024.
In the UK, the unemployment rate edged up to 5.2%, a five-year high, while wage growth slowed to 3.9%, signalling a softening labour market.
Energy stocks outperform as mining stocks come under pressure
In equities, energy stocks outperformed sharply amid the price surge, with Equinor rising 11.03%, Var Energi up 11.72% and Aker BP gaining 6.97%, while BP added 3.51%.
European majors Galp Energia, Eni and TotalEnergies also posted gains of 3.79%, 3.75% and 4.2%, respectively.
On the downside, mining stocks came under pressure, with Antofagasta down 5.65% and Fresnillo falling 8.91% as higher energy costs weighed on margins.
Infrastrutture Wireless Italiane slumped 15.6% after plans by Telecom Italia and Fastweb to build up to 6,000 telecom towers raised concerns over increased competition.
Reporting by Josh White for Sharecast.com.
241.79 (2.35%)
0.00