(Bloomberg) — European stocks trimmed a decline sparked by revived tensions in the Middle East, while L’Oreal SA rallied after better-than-expected quarterly sales.
The Stoxx Europe 600 Index was down 0.4% at 1:09 p.m. in London, after falling as much as 0.9%. Energy stocks dropped the most as oil wiped out an earlier sharp jump. L’Oreal stock was up 4.4% after the cosmetics maker’s like-for-like sales beat expectations, quelling worries over a slowdown in the beauty market.
Israel launched a retaliatory strike on Iran less than a week after Tehran’s rocket and drone barrage, according to two US officials, but Iranian media appeared to downplay the incident in the hours that followed the initial reports. According to Iran’s state-run Nour News, an Israeli attempt to use drones in a “sabotage” operation against the country failed.
“The markets, as they have done in recent months, are reacting very calmly and objectively regarding the real risk that an escalation in the Middle East could significantly affect the world economy,” said Roberto Scholtes, head of strategy at Singular Bank. “Oil has not rebounded in recent days, and its rise in previous months is largely due to the strength of demand.”
The Stoxx 600 Europe Index is set for a third weekly decline for the first time since October, with geopolitical tensions adding to concerns around the Federal Reserve keeping interest rates higher for longer than previously expected.
“The movements in the stock markets and bonds are caused by expectations about the Fed, and must be framed in the corrective process in stocks that is taking place this month after spectacular increases,” Scholtes said.
Among other individual movers Friday, Royal Unibrew A/S shares soared 16% after the brewer reported preliminary net revenue and Ebit that came ahead of consensus expectations.
Here’s more of what investors and analysts are saying:
Marija Veitmane, senior multi-asset strategist at State Street Global Markets
“For now, the market is not in a panic mode. Markets, as well as Iran and Israel, are downplaying the attacks. Equity futures are recovering and oil has given up all of the earlier gains. Of course, we can’t ignore the attacks, but it feels like stronger inflation and growth data and re-pricing Fed cuts is dominating market attention. Having said this, more cautious positioning fits with our market read at the moment.”
Ekaterina Iliouchenko, Union Investment Privatfonds GmbH
“Middle East conflict, if it not escalates to the second front, is not great and tragedy for the local population but probably would have temporary impact. But there is memory of Russia-Ukraine case between 2014-2022; we used to have volatility from time to time along those years, and there were even a couple of times we were very close to the escalation but nothing happened in that period, until after 2022. So it is hard to time and predict this type of geopolitical risk.”
Benjamin Toms, RBC Capital Markets analyst
“Potential impact on energy costs which could keep inflation higher for longer, which could ultimately mean that central banks defer rate cutting. It creates macro-economic uncertainty which will mean that businesses may defer investment decision making.”
“Volatility will help some parts of investment bank trading revenues but will be a headwind to other revenue streams in capital markets.”
Bernd Meyer, chief investment strategist and head of Multi Asset at Berenberg
“The Israeli counter-attack appears to be moderate and not designed to escalate. This gives hope that further escalation can be avoided. A negative market reaction should therefore be limited.”
“In view of the more persistent inflation, geopolitical risks and possible sanctions, we continue to see good opportunities in commodities and commodity stocks, especially as investors still appear to be underinvested here.”
Susana Cruz, strategist at Liberum
“Policy uncertainty probably means that markets will be more volatile than they have been in the last six months. The dollar will probably advance, because on top of the Middle East tensions, we now know the Fed can’t cut interest rates soon whilst the ECB and BoE will do so in order to boost activity. This limits the upside for stocks for now, particularly for companies operating in domestic markets in Europe.”
Christoph Witzke, chief investment officer & head of Portfolio Management at Deka Investment
“For me, further developments in the Middle East remain subject to increased uncertainty. As a fund manager, I am paying particular attention to the reaction of the oil price and the US dollar. So far, the movement has been muted. If this remains the case, we are currently more likely to see a recovery in equities over the next few days/weeks than the emergence of a new downtrend. This is because the longer-term framework remains quite constructive.“
Ipek Ozkardeskaya, Swissquote Group Holding senior analyst
“Because the geopolitical landscape remains high in the region, there is a risk that tensions will get out of control. Oil prices in this context are expected to remain supported, with the risk of a further rally. Rising oil prices should further fuel the global inflationary pressures and threaten the major central banks’ rate cutting plans. A hawkish shift from global central banks, on the other hand, would hammer risk appetite, reverse the reflation trade (that has been backed by soft central bank expectations), and weigh on global stock indices and commodity prices”
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–With assistance from Sagarika Jaisinghani, Michael Msika, Tugce Ozsoy, Sonja Wind and Ellie Harmsworth.
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