European stock indices exhibited mixed performance on Tuesday, edging down slightly from recent gains. The announcement of a new round of US strikes on southern Iran dampened investor expectations for an imminent US-Iran peace deal, subsequently driving oil prices higher.
Since the onset of hostilities between the US, Israel, and Iran in late February, oil and gas supplies from the Middle East have been severely disrupted. Over the past week, market sentiment had turned optimistic, with traders betting on a de-escalation of the conflict.
However, traders recalibrated their expectations on Tuesday following the US announcement on Monday of what it termed "defensive strikes" in southern Iran. While negotiations are ongoing, US Secretary of State Marco Rubio stated on Tuesday that talks on a deal with Iran might "require several more days."
As of 08:43 GMT: The STOXX Europe 600 index was down 0.2% intraday, though remaining near its post-conflict highs. The UK's FTSE 100 index gained 0.7%. Germany's DAX index declined by 0.7%. The MSCI World Equity Index was flat, having accumulated a 3.8% gain for the month.
Peter Schaffrik, a Global Macro Strategist at RBC Capital Markets, noted that Middle East uncertainty continues to weigh on market sentiment. "The situation has shifted from 'a deal is imminent' to 'nations signing the Abraham Accords' to 'airstrikes.' The picture is unclear," he said, referencing former US President Donald Trump's statement on Monday that he had urged more countries to sign the Abraham Accords while attempting to negotiate an end to the war with Iran.
Oil prices advanced: Brent crude futures rose 3.6% intraday to $99.64 per barrel. US West Texas Intermediate (WTI) crude was at $93.09, down 3.7% from Friday's close. There was no WTI settlement on Monday due to the US Memorial Day holiday.
Schaffrik added that underlying optimism persists in the market, with traders hopeful for a swift resumption of shipping through the Strait of Hormuz. Brent crude has retreated significantly from its late-April peak above $120 per barrel.
European traders are also monitoring comments from European Central Bank (ECB) board member Isabel Schnabel. She told Reuters that the ECB should still raise interest rates in June even if a US-Iran deal is reached, as the conflict has lasted far longer than anticipated, and high oil prices are spilling over into the broader economy. Money market traders are pricing in approximately a 90% probability of an ECB rate hike at its June meeting.
Following the US military strikes, European government bond yields moved higher. However, the benchmark 10-year German Bund yield remained near its lowest level in nearly seven weeks at 2.9792%. Yields had fallen last week as investor concerns about the war's impact on inflation and growth eased. US Treasury bonds strengthened as investors maintained an optimistic outlook for the restoration of shipping through the Strait of Hormuz.
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