European shares hit more than two-month low

The pan-European STOXX 600 dropped for a third straight session, closing down 0.6%, after marking its worst weekly performance in almost a year

European shares hit their lowest level in more than two months on Monday before paring some declines, ‌as a sharp surge in oil prices exacerbated inflation fears while the U.S.-Israeli war with Iran showed no signs of easing.

The pan-European STOXX 600 dropped for a third straight session, closing down 0.6%, after marking its worst weekly performance in almost a year.

The index has dropped around 6% below ​its record closing high hit on February 27. Europe’s fear gauge, the STOXX volatility index, hit its highest ​since April, before closing lower for the day.

Europe is heavily dependent on liquefied natural gas and imported oil, which has soared more than 25% ​to just under $120 a barrel, leaving it particularly exposed to supply shocks. A prolonged war could drive energy and transport costs even higher at a time when economic growth is already fragile.

There may potentially be further moves higher, before the eventual decline. If prices do then fall ​back, the global economic cycle would have a more stagflationary feel but wouldn’t be fundamentally derailed, said Paul Diggle, chief ​economist at Aberdeen.

Energy stocks on the STOXX 600 were the only ones trading higher, up 1.4%. Real estate stocks were hit the most ‌as concerns ⁠over reviving inflation pushed back bets on interest rate cuts, down 2.7%.

Central banks across Europe came under market pressure on Monday to raise interest rates, with the European Central Bank seen lifting rates once by June or July. European bond yields hit their highest levels in a year.