European Stocks Slip as U.S.-Iran Tensions Push Oil Past $90 and ECB Rate Hike Looms

TLDR

European stocks edged lower Monday as U.S.-Iran military clashes in the Strait of Hormuz pushed Brent crude above $90 a barrel Iran plans to declare a restricted zone near Hormuz after U.S. forces struck three Iranian oil tankers over the weekend The ECB is expected to raise rates by 25 basis points on Thursday, with Deutsche Bank forecasting another hike in December Novartis dropped over 3% after its cholesterol drug failed a closely watched clinical study U.S. CPI data later this week will be key to whether the Federal Reserve raises rates at its September meeting

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European stocks opened the week on shaky ground Monday as a military standoff between the U.S. and Iran rattled energy markets and a looming European Central Bank rate decision kept investors cautious.

The pan-European STOXX 600 moved between small gains and losses, hovering near multi-week lows. Germany’s DAX fell 0.3% and France’s CAC 40 also traded lower.

EURO STOXX 50 I (^STOXX50E)

Switzerland’s main index dropped 1.2%, pulled down largely by Novartis, which fell more than 3% after its experimental cholesterol drug failed in a closely watched clinical study.

Oil Surges on Strait of Hormuz Fears

Brent crude climbed more than $1 a barrel on Monday, extending a near 10% surge from the prior week to trade firmly above $90.

The move came after U.S. forces struck and disabled three Iranian oil tankers over the weekend. Washington said the strikes were retaliation for an Islamic Revolutionary Guard Corps ballistic missile attack on two U.S. Navy warships in the region.

Iran responded by signaling plans to declare a restricted military zone outside the Strait of Hormuz within days.

The Strait of Hormuz carries roughly 20% of global seaborne oil and gas. Any disruption there raises the risk of higher energy costs flowing through to broader inflation.

Energy stocks in Europe were a rare bright spot, rising 1.2% as oil prices climbed.

ECB Expected to Raise Rates Thursday

The ECB is widely expected to lift its key interest rate by 25 basis points at Thursday’s policy meeting. The decision is driven by Eurozone inflation accelerating to 3.3% in August, with energy costs jumping 14.3%.

Deutsche Bank now expects the ECB to follow the September move with another quarter-point hike in December. Traders are also pricing in at least one more increase in 2027.

Elevated rate expectations have kept German 10-year bond yields near multi-year highs, pressuring rate-sensitive sectors like real estate and construction.

Germany’s political backdrop added to the unease. The far-right AfD party won 44% of the vote in Saxony-Anhalt state elections over the weekend, dealing a blow to Chancellor Friedrich Merz, though the party fell short of an outright majority.

Italy’s Lottomatica bucked the trend, rising 6.8% after providing details on how its merger with Spain’s Cirsa would grow its online business. Cirsa shares rose 7%.

Investor morale across the Eurozone rose to its highest level in over four years in September, according to a survey released Monday.

All eyes now turn to U.S. Consumer Price Index data due later this week. A hot reading could cement a Federal Reserve rate hike at its September 15-16 meeting, adding further pressure to global equity markets.

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