European share indexes began Friday's session on the back foot as oil stayed above $100 a barrel, despite recent measures by the U.S. intended to permit some countries to buy sanctioned Russian crude to help alleviate a global supply shortage. By 04:04 ET (08:04 GMT), the pan-European Stoxx 600 was down 0.7%. Germany’s Dax had slipped 0.9%, France’s CAC 40 had declined 1.0%, and the U.K.’s FTSE 100 had eased 0.8%.
Markets in the region opened with negative momentum after a muted handover from Asian bourses, where major indexes in South Korea and Japan — both significant importers of Middle Eastern oil — fell by more than 1.4%. The weakness reflected a market consensus that the joint U.S.-Israeli assault on Iran will not be resolved quickly, and that the associated risks to energy flows remain acute.
Several European economies, like many in Asia, rely heavily on energy supplies that transit the Strait of Hormuz, a strategically critical corridor bordered on three sides by Iran. New Iranian Supreme Leader Mojtaba Khamenei said on Thursday that the strait will remain closed until the fighting ceases. Container shipping through the waterway has effectively stopped, with carriers concerned about potential attacks that could threaten crew safety. Shipping companies are also facing rising difficulty securing insurance for voyages perceived as increasingly hazardous.
Efforts by the U.S. and the International Energy Agency to increase available crude volumes have produced only limited additional supply, and Brent crude has responded by pushing back above the $100-a-barrel mark. Price swings in Brent have been pronounced: earlier in the week the benchmark surged as high as nearly $120 a barrel before temporarily dropping below $90 a barrel. Despite short-term moves, oil remains substantially above pre-conflict levels, a dynamic that has heightened fears of upward pressure on consumer prices globally and complicated expectations for central bank policy easing.
Those inflation worries have been reflected in sovereign debt markets, where yields in Germany and France have risen, exerting additional downward pressure on equities. Analysts at ING highlighted the regional divergence in performance, noting in a research note that "European and Asian equity markets have been hit harder than those of the U.S., and the longer the crisis goes on, the greater this divergence will become."
Against this backdrop, market participants have turned their attention to fresh inflation readings from within the euro area. On an EU-harmonized basis, consumer prices in France rose by 1.1% year-on-year in the 12 months to February, matching forecasts and accelerating from 0.4% in January. Spain recorded a similar upward move, with its harmonized measure edging up to 2.5%.
Later in the U.S. trading day, investors will receive the personal consumption expenditures price index for January, a closely watched inflation gauge favored by the Federal Reserve. It is important to note that the European inflation figures cited largely cover a period before the recent escalation of the Iran conflict, which began with a barrage of U.S. and Israeli air strikes on Iran in late February. As a result, the outlook for inflation has worsened since hostilities intensified, particularly in Europe where economists had suggested price growth had been largely contained until recently.
In addition to macroeconomic data and geopolitical developments, market participants are also weighing investment products that claim to use artificial intelligence in portfolio selection. Promotional material circulating in market channels notes that certain AI-driven global portfolios have outperformed benchmarks year to date, with claims that two-thirds of those portfolios are beating their benchmarks and 88% are in positive territory. The same material highlights a flagship strategy that reportedly outperformed the S&P 500 over an 18-month period and lists a pair of notable winners. These performance statements are being referenced by some market participants as they assess portfolio positioning in a more volatile market environment.
Market context and takeaways
- Oil prices remaining above $100 a barrel are a central factor pressuring European equities, contributing to higher government bond yields and concerns about renewed inflation.
- Disruption to shipping through the Strait of Hormuz and statements from Iran’s leadership have intensified supply risk perceptions, affecting energy-importing economies.
- Eu harmonized consumer price measures from France and Spain show inflation picking up in February, while U.S. PCE data for January is due later in the day and will be closely watched.