European shares drop as Middle East expectations dim

The pan-European index was down 0.2% at 613.88 points, with the benchmark closer to its pre-war levels than the mid-March lows

European shares dropped ​on Monday as expectations of a swift resolution to the Middle East war ‌dimmed following the breakdown of U.S.-Iran negotiations and Washington’s reported decision to impose a blockade around the Strait of Hormuz.

The pan-European index was down 0.2% at 613.88 points, with the benchmark closer to its pre-war levels than the mid-March lows.

Some ​regional bourses were also lower, with Germany’s DAX and Spain’s IBEX 35 dropping 0.3% ​and 1%, respectively.

The deadline for the start of a U.S. military blockade passed after Tehran threatened to retaliate, if Iranian ports were threatened.

Rising ​tensions pushed oil prices above the $100-per-barrel mark, adding to inflation worries that have remained on the forefront ​since the war began.

The absence of progress in US-Iran talks over the weekend has challenged market optimism. This reinforces our view that investors should mitigate risks through diversification and hedging, UBS analysts said.

We continue to recommend staying ​invested, as we believe both parties are incentivized to find a resolution, they said.

Monday’s downturn follows a ​rally last week, when the STOXX 600 added 3% on investor optimism that a temporary U.S.-Iran ceasefire could lead to ⁠end of hostilities.

Financial shares rose 1.2%. British fintech firm Wise advanced 6.5% after its quarterly cross-border volumes surged ahead of its Nasdaq debut.

The aerospace & defence index was higher after coming under pressure last week. Germany’s Rheinmetall and UK’s BAE Systems were up over 2% each.

Communication services and healthcare weighed ​heavily on the benchmark index. ​Shares of Deutsche ⁠Telekom dropped 6% after hitting an over two-month low earlier after JP Morgan cut the German firm’s price target.

French luxury giant LVMH said it suffered ​a heavy impact from the Middle Eastern war, with sales dropping in ​the Gulf. ⁠Shares were marginally lower.