By Elizabeth Howcroft
PARIS, May 26 (Reuters) – European stock indices were mixed on Tuesday, retreating slightly from recent gains, and oil prices rose after fresh U.S. attacks in southern Iran dampened investors’ hopes that a U.S.-Iran peace deal could be imminent.
Market sentiment had become more positive over the past week as traders bet on a de-escalation of the US-Israel war against Iran, which has severely disrupted Middle East oil and gas supplies since it began in late February.
But traders readjusted this view on Tuesday after the United States said on Monday it had carried out what it called defensive strikes in southern Iran. As talks continue, US Secretary of State Marco Rubio said Tuesday that negotiating a deal with Iran could “take a few days.”
At 0843 GMT, the STOXX 600 was down 0.2% on the day, but still near its highest level since the war began. London’s FTSE 100 was up 0.7% on the day, while Germany’s DAX was down 0.7%. The MSCI World Equity Index was stable but up 3.8% so far this month.
Peter Schaffrik, global macro strategist at RBC Capital Markets, said uncertainty in the Middle East was weighing on markets.
“It went from an agreement where almost everyone needs to sign the Abraham Accords to bombing, so it’s not entirely clear what’s going on there,” he said, referring to US President Donald Trump’s words on Monday that he had called on other countries to sign the Abraham Accords as he tried to negotiate a deal to end the war with Iran.
Oil prices rose, with Brent crude futures rising 3.6% on the day, to $99.64 a barrel. US West Texas Intermediate was down 3.7% from Friday’s close, to $93.09. There was no WTI settlement on Monday due to the Memorial Day holiday in the United States.
Still, there was some underlying optimism in the market, Schaffrik said, as traders held out hope that the Strait of Hormuz could soon reopen to traffic. Brent crude oil is down significantly from its late April high above $120.
European traders were also weighing comments from Isabel Schnabel, a board member of the European Central Bank, who told Reuters that the central bank should raise “interest rates in June, even if ongoing peace talks with Iran produce a deal, as the conflict has been much longer than projected and high energy prices are spreading to the broader economy. Money market traders are pricing in a around 90% chance of an increase at the ECB’s June meeting.
European bond yields rose following the US attacks, but the German benchmark 10-year yield was still near its lowest level in almost seven weeks, at 2.9792%. Yields had fallen last week as investors became less concerned about the war’s impact on inflation and growth. U.S. government bonds rallied as investors still held out hope about a deal to reopen the Strait of Hormuz.