European Stocks Head Lower on Mideast Jitters

European stocks declined on Monday, with both the STOXX 50 and STOXX 600 falling around 1.5%. This extends last week’s nearly 3.8% drop, leaving the indices at levels not seen since September and November of last year, respectively. Investor sentiment remains pressured by escalating tensions in the Middle East, which continue to drive oil prices higher. President Trump issued a 48-hour ultimatum to Iran to “fully open” the Strait of Hormuz. Iranian Parliament Speaker warned that entities purchasing US government bonds could be considered legitimate targets. All sectors traded in negative territory, with financials and industrials leading the losses. Mega-cap stocks also moved lower, including ASML Holding (-1%), HSBC Holdings (-0.8%), and LVMH (-0.4%). Poste Italiane dropped more than 5%, making it the worst performer on the STOXX 600, after announcing a €10.8 billion bid for Telecom Italia. Shares of Telecom Italia, however, rose 5.4% on the news.

European equity markets were set to open lower on Monday, extending last week’s selloff as investors tracked developments in the Middle East conflict and assessed the impact of elevated energy prices on inflation and growth. The US-Israel war with Iran entered its fourth week with no sign of easing, with President Donald Trump threatening strikes on Iranian power plants if the Strait of Hormuz is not reopened, while Tehran warned it would target key US and Israeli assets across the region if its energy facilities were hit. Surging energy prices have fueled global inflation concerns, prompting a hawkish tilt among major central banks. Last week, the European Central Bank kept rates unchanged but signaled readiness to raise them in the near term if price pressures continue to build. In premarket trade, Euro Stoxx 50 and Stoxx 600 futures were both down more than 1%.

European stocks closed sharply lower on Friday as risks to energy supply triggered a surge in their prices and risks of stagflation in European economies. The Eurozone's STOXX 50 fell 1.9% to the lowest since September, and the pan-European STOXX 600 dropped 1.72% to 574. ASML and SAP dropped more than 3.5% each to track the sharp losses for the global tech sector. Banks were also sharply lower as sovereign bonds extended their selloff, pressuring major lender balance sheets with UniCredit sinking nearly 4% and BNP Paribas, Intesa Sanpaolo, and Nordea dropping more than 2%. Hawkish signals from ECB policymakers yesterday drove rate traders to position for two hikes this year, with the first potentially being delivered as early as next week.