European stock markets traded cautiously lower on Thursday as investors monitored the escalating conflict in the Middle East and its knock-on effects for energy markets and economic sentiment.
At 03:02 ET (08:02 GMT), Germany's DAX was down 0.4%, France's CAC 40 fell 0.4% and the U.K.'s FTSE 100 slipped 0.1%.
Conflict developments and market reaction
The conflict has broadened since weekend missile strikes by the U.S. and Israel on Iranian targets. Incidents reported during the week included the sinking of an Iranian warship by a U.S. submarine off Sri Lanka and NATO air defences intercepting an Iranian ballistic missile launched toward Turkey. These developments have contributed to a market tone dominated by risk aversion.
Political moves in the U.S. added to signals that the air campaign could continue. The U.S. Senate voted largely along party lines against a motion that would have curtailed the air campaign and required congressional authorization for further military action. Separately, the White House said Mojtaba Khamenei, the son of Iran's slain supreme leader, has emerged as a frontrunner to succeed him, a comment that the White House suggested indicated Tehran was not likely to yield to external pressure.
International Monetary Fund Managing Director Kristalina Georgieva warned that the conflict is testing "global economic resilience." She said a prolonged confrontation has clear potential to influence global energy prices, market sentiment, growth and inflation, and would increase demands on policymakers worldwide.
Policy and data in focus
Rising energy costs are fuelling concerns that inflation in energy-import-dependent Europe could climb, increasing pressure on the European Central Bank to consider further rate hikes. Yet not all policy makers see an immediate case for action. Bank of France Governor and ECB policy maker Francois Villeroy de Galhau said he saw no reason for the central bank to raise interest rates at present. He acknowledged the conflict could push inflation higher and growth lower, but said the net effect would depend on how long the situation persists.
Investors are also awaiting eurozone retail sales data for January, with the monthly figure forecast to increase 0.3% and the annual gain expected at 1.7%.
Earlier in the session, China set its 2026 growth target in the 4.5% to 5% range, a slight reduction from last year's 5% pace and the smallest target since 1991.
Corporate results: pockets of strength
Reporting season provided additional context for the market mood. U.K. consumer goods group Reckitt Benckiser (LON:RKT) exceeded expectations for fourth-quarter like-for-like net sales growth, driven by robust performance in emerging markets, and projected its core businesses would grow 4% to 5% in 2026.
German logistics company Deutsche Post (ETR:DHLn) predicted a higher operating profit for 2026, a forecast broadly in line with market expectations despite deteriorating geopolitical conditions.
Zurich Insurance (SIX:ZURN) recorded its highest-ever annual profit for 2025, helped by an exceptional showing at a U.S. business the Swiss insurer does not own and by an unusually quiet catastrophe year.
Swiss dermatology firm Galderma (SIX:GALD) more than doubled its peak sales target for its skin drug Nemluvio to above $4 billion, after reporting record annual net sales surpassing $5 billion for the first time.
German residential landlord LEG Immobilien (ETR:LEGn) published full-year 2025 results that beat estimates on key metrics and reiterated its 2026 guidance. However, a gradual uptick in vacancy rates and part-payment of dividends in shares softened the headline figures.
Oil market dynamics
Energy markets reacted to the geopolitical tensions, with crude futures extending gains. Brent rose 2.9% to $83.75 a barrel while U.S. West Texas Intermediate climbed 3.2% to $77.08 a barrel. Both benchmarks marked a fifth consecutive session of gains, and Brent reached levels not seen since July 2024 as traders weighed risks to supply after the recent attacks and disruptions in the region.
Analysts and traders remained focused on the Strait of Hormuz, where Iran has targeted tankers and where roughly one-fifth of the world's oil and liquefied natural gas transits. Actions affecting traffic through that chokepoint have amplified concerns about potential supply constraints.
What investors are watching next
- Eurozone retail sales for January, with consensus on a modest monthly gain and a 1.7% annual increase.
- The trajectory of the Middle East conflict, given its implications for energy prices, inflation and growth.
- Further corporate updates as more companies report quarterly results and issue guidance for 2026.
Markets remain alert to fresh developments that could shift sentiment quickly, with energy and financial sectors particularly sensitive to changes in the geopolitical outlook.