European shares hit lowest level since December

The pan-European STOXX 600 index closed 2.4% ​lower at 583.73 points, erasing gains from earlier this week

European shares dropped on Thursday to their lowest level since December, after the European Central Bank warned that ‌inflation could worsen if the Middle East war drags on.

The ECB’s remarks, its first since the war began, and the market’s reaction underscore how asset prices remain heavily tied to developments in the Middle East, with Europe highly exposed ​to risks from surging oil prices and supply disruptions.

The pan-European STOXX 600 index closed 2.4% ​lower at 583.73 points, erasing gains from earlier this week.

If energy prices keep ⁠rising, we suspect that the balance of opinion will shift towards getting on the front foot ​by hiking at the next meeting at the end of April, and perhaps by as much as 50 ​basis points, said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.

Before the war began, investors had expected the ECB to hold interest rates steady ​through 2026.

This view has shifted dramatically, with markets now pricing in at least two 25-basis-point rate hikes by the end ‌of ⁠this year, according to LSEG data.

Bourses in Frankfurt, Madrid, London, ​Paris and Milan all dropped ​more than 2% ⁠on Thursday.

Most major sectoral sub-indexes ​in the STOXX ⁠600 traded in negative territory, barring energy stocks. Miners slid 4.2% as gold prices pulled back, while weakness among several heavyweight financial stocks added to market woes.

Europe’s fear gauge index firmed for the second straight session.

This ⁠buy-the-dip situation ​is nice, we’re not sure there’s enough money and confidence ​right now to drag markets upward, said Michael Field, chief European equity strategist at Morningstar. That just shows you the lack of clarity ​that we have.