March 19 (Reuters) - European shares slipped on Thursday as an intensifying conflict in the Middle East sapped risk appetite while markets awaited the European Central Bank's monetary policy verdict.
European shares slide to three-month low as ECB flags inflation risks from Middle East war
European Markets React to Middle East Conflict and Central Bank Warnings
By Pranav Kashyap, Avinash P and Niket Nishant
March 19 (Reuters) - European shares tumbled on Thursday to their lowest level since December, after the European Central Bank warned that inflation could worsen if the Middle East conflict drags on.
ECB's Warning and Market Impact
The ECB's remarks, its first since the conflict 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.
Potential for Further Rate Hikes
"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.
Escalating Tensions in the Middle East
Iran attacked energy facilities across the Middle East on Thursday following Israel's strike on its major South Pars gas field, pushing oil prices higher and reinforcing fears of a prolonged conflict.
Shifting Expectations for Central Bank Policy
Before the conflict began, investors had expected the ECB to hold interest rates steady through 2026.
Market Adjustments to Rate Hike Expectations
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.
Global Central Bank Responses
Meanwhile, the Bank of England also chose to keep borrowing costs unchanged, saying it was "ready to act" to contain risks from the war. The U.S. Federal Reserve, too, had left rates unchanged on Wednesday, projecting higher inflation amid elevated uncertainty.
Regional Equity Performance
Broad Market Declines
EQUITIES ACROSS REGION UNDER PRESSURE
Bourses in Frankfurt, Madrid, London, Paris and Milan all fell more than 2% on Thursday.
Norway's Outperformance
Norway, however, climbed 1.6% to a fresh record high, extending its winning streak to a seventh straight session helped by a rise in energy stocks, which account for a major chunk of the index.
Sectoral Movements
Most major sectoral sub-indexes in the STOXX 600 traded in negative territory, barring energy stocks. Miners shed 4.2% as gold prices retreated, while weakness among several heavyweight financial stocks added to market woes.
Market Sentiment and Volatility
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."
Reporting Credits
(Reporting by Avinash P in Bengaluru; Editing by Mrigank Dhaniwala, Eileen Soreng and Jonathan Ananda)
