European equities opened the week on a subdued note on Monday as a breakdown in U.S.-Iran peace negotiations sent oil prices higher and sapped investor appetite for risk. The pan-European STOXX 600 was flat at around 611.68 points as of early trading, according to Reuters, with regional bourses moving in divergent directions.
Trump Rejects Iran Proposal as Tensions Flare
The muted session followed President Donald Trump’s rejection of Iran’s latest response to a Washington peace proposal, which he called “totally unacceptable”. Tehran had proposed ending the war on all fronts, including Lebanon, along with compensation for war damage and claimed sovereignty over the Strait of Hormuz, according to Iranian state television.
The exchange marked a sharp reversal from earlier in the month, when reports that the two sides were closing in on a deal sent oil prices tumbling and European stocks surging. The STOXX 600 had rallied 2.2% on May 6 to 623.25 points on that optimism, according to Reuters. Fresh hostilities last week — including Iranian seizure of an oil tanker and U.S. strikes on Iranian military sites — further undermined confidence in the ceasefire that has held since April 8.
“While the re-escalation in hostilities interrupted recent optimism over a potential deal that could reopen the Strait, we still believe an eventual diplomatic solution should emerge,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Energy Dependence Leaves Europe Exposed
London’s FTSE 100 edged up 0.2% on Monday, buoyed by its heavy weighting toward commodity producers, while France’s CAC 40 slipped 0.7%. Defence stocks led declines, falling 2.1%, with Germany’s Rheinmetall dropping 9.2% and Rolls-Royce shedding more than 3%.
The war has shuttered the Strait of Hormuz, a chokepoint for roughly a fifth of global oil and liquefied natural gas flows, and European markets remain about 4% below pre-war levels, lagging global peers that have rebounded on artificial intelligence-driven optimism. Goldman Sachs cut its eurozone growth forecast to 1% earlier this year and projected headline inflation peaking at 2.9% in the second quarter as energy costs ripple through the economy.
Rate Hike Fears Add Pressure
European Central Bank governing council member Martin Kocher warned Monday that the ECB would need to adjust interest rates soon if the inflationary outlook did not improve, with money markets now pricing in two or more rate hikes this year, starting as early as June. European natural gas futures have climbed more than 27% over the past year, underscoring the continent’s vulnerability to prolonged supply disruption.
