Europe midday: Stocks drop into the red on geopolitical tensions

(Sharecast News) - After a tentative stint in positive territory, European stocks fell into the red by Wednesday lunchtime, as geopolitical uncertainty saw markets resume their downward path to levels not seen in six weeks.

By 1322 CEST, the pan-European Stoxx 600 was down 0.5% at 539.56, with most major indices across the continent registering moderate losses.

The Stoxx 600 has now fallen in seven of the past eight trading sessions, as Israel and Iran continue to trade airstrikes for the the sixth straight day.

Overnight, Donald Trump called for Iran's "unconditional surrender" as airstrikes between Tel Aviv and Tehran continued. The US president claimed that the US were aware of Supreme Leader Ayatollah Ali Khamenei's whereabouts but wouldn't kill him "at least for now".

He said that "we now have complete and total control of the skies over Iran", suggesting close contact between Washington and Tel Aviv, and raising fears that the US may join Israel's strikes.

"Investors are focused on the hostilities between Israel and Iran. But most importantly, they are factoring in the chances of US involvement. This makes for a very fluid, headline-driven trading environment," said David Morrison, senior market analyst at Trade Nation.

"Yet despite this, there has been no sense of panic from investors. Of course, as far as the US is concerned, events are taking place a long way from home, and may they consider to do so. But there's also a feeling that investors are betting on a short and sharp engagement, resulting in a more stable position across the Middle East than the one that currently exists."

UK, EU and US data on tap

In macro news, the year-on-year rate of UK inflation eased to 3.4% in May from 3.5% in April, in line with economists' expectations. However, food inflation picked up to 4.4% - its highest in 15 months.

The data is unlikely to have changed the consensus for Thursday's policy decision at the Bank of England, with market participants expecting interest rates to be left where they are as rates stay significantly above the central bank's target of 2%.

However, Danni Hewson, AJ Bell head of financial analysis, said there could be "a degree of wiggle room". With both core inflation and service sector inflation having slowed, Bell said the BoE "may want to get ahead of potential volatility in order to stimulate a flatlining economy which looks perilously close to toppling towards stagflation. But with such uncertainty and volatility, staying put might seem like the only smart move."

Meanwhile, final estimates from Eurostat confirmed that eurozone inflation fell to 1.9% last month from 2.2% in April, dropping below the European Central Bank's 2% target for the first time in eight months. The core inflation rate also fell to 2.3% from 2.7%, in line with the earlier estimate and the lowest rate since October 2021.

Looking ahead to the rest of the day, US building permits and jobless claims figures are set to be released. However, all eyes will be on the Federal Reserve's latest policy announcement, due after the close of European markets, though no changes to the policy rate expected.

Market movers

German packaging group Gerresheimer jumped 8% due to reports that KPS Capital Partners was still potentially teaming up with Warburg Pincus on a possible takeover approach for the company.

Swiss pharma outfit Bachem was rising 7% after positive comments from Berenberg, which initiated coverage with a 'buy' rating and a target price which predicts 35% upside from current levels. The broker labelled Bachem a "high-growth stock with a lot of caution priced in".

French aerospace giant Airbus was on the ascent, up 2% after announcing that it would hike its dividend payout ratio over the coming years amid predictions of strong demand for aircraft.

Over in London, Tullow Oil tumbled 19% following a report that potential merger talks between it and Canadian-listed peer Meren Energy have collapsed.