European equity markets sold off sharply on Monday as oil prices surged toward $120 a barrel, compounding weeks of turbulence triggered by the ongoing military conflict between the United States, Israel, and Iran and reigniting fears of an inflationary shock across the continent.
The pan-European STOXX 600 index closed down around 0.7%, with major bourses and virtually all sectors in negative territory except oil and gas. The decline extended a brutal stretch for European equities. The index closed last week approximately 4.6% lower, its steepest weekly loss since April, when fears over a United States-China trade war drove a comparable sell-off.
Germany’s DAX dropped 2.6% in early trading to 22,983.67, France’s CAC 40 fell 2.7% to 7,779.46, and Britain’s FTSE 100 shed 1.9% to 10,089.05. The only major European market to avoid losses was Norway, whose benchmark edged slightly higher given its status as an oil exporter.
Brent crude, the international benchmark, rose by more than 30% on Sunday, briefly touching $119 a barrel, levels not seen since Russia’s invasion of Ukraine in 2022. The surge has been driven by Iran’s effective shutdown of tanker traffic through the Strait of Hormuz, a waterway that ordinarily carries about one fifth of the world’s daily oil supply.
Iraq, the United Arab Emirates, and Kuwait have all cut production as a backlog of unsellable barrels continues to accumulate, while attacks on Gulf energy facilities have added further pressure on supply. Saudi Arabia also began cutting output on Monday, becoming the latest major Gulf producer to be operationally disrupted by the conflict.
Europe has been hit especially hard owing to its heavy dependence on Middle Eastern oil and gas. Gas prices jumped further after Qatar shut off production at its Ras Laffan facility following Iranian attacks on the facility.
Three European Central Bank (ECB) policymakers warned last week that if the conflict pulls in more countries, euro zone inflation could rise just as economic growth begins to sag, an uncomfortable combination for investors already pricing in a prolonged period of elevated commodity prices. Morgan Stanley has projected the ECB will hold rates steady through 2026 given the inflation risks arising from the conflict.
The appointment of Mojtaba Khamenei as Iran’s new Supreme Leader has deepened market anxiety. Analysts at Saxo Markets described the move as a signal that Iran’s hardline posture will persist, saying markets had replaced earlier complacency with concern that the conflict would prove far more prolonged than initially assumed.
Macquarie Research analysts warned that if the Strait of Hormuz remains effectively closed for even a few weeks, oil prices could push toward $150 a barrel, adding that without a fast cessation of hostilities, the crude market would begin to break within days rather than weeks or months.
