Markets Hold Steady Amid Fresh Questions Over Middle East Diplomacy
European equities traded with little direction on Friday as investors balanced uncertainty surrounding the Middle East against concerns that U.S. interest rates may remain higher for longer.
The pan-European STOXX 600 was broadly unchanged in early trading, while Germany’s DAX gained 0.2%. France’s CAC 40 and Italy’s FTSE MIB each advanced 0.3%.
Investor sentiment was affected after U.S. Vice President JD Vance withdrew from a planned visit to Switzerland, where talks with Iranian representatives were expected to begin on implementing the recently announced 14-point agreement between Washington and Tehran.
Peace Deal Supports Weekly Gains, but Hawkish Fed Caps Momentum
Despite Friday’s cautious tone, European markets remain on track for a second consecutive week of gains. Earlier optimism was driven by the breakthrough agreement between the United States and Iran, which paved the way for the reopening of the Strait of Hormuz and triggered a sharp decline in oil prices.
The fall in crude eased fears of a prolonged inflation shock, offering relief to European equities that had come under pressure during the height of geopolitical tensions.
However, the STOXX 600’s weekly advance of around 0.6% has lagged behind the gains seen in Asian markets, where major indices have risen by more than 1%.
A key reason for the more subdued performance has been the Federal Reserve’s unexpectedly hawkish stance. With several policymakers signalling the possibility of another interest-rate increase before year-end, investors have rapidly adjusted expectations, with markets now pricing in roughly an 80% probability of a rate hike in October.
Dan Coatsworth, head of markets at AJ Bell, said: “The Fed struck a surprisingly hawkish tone on rates and spooked investors, as new chair Kevin Warsh indicated he would give less direction on future policy than had previously been the case.”
He added: “This means more of the uncertainty which markets typically hate.”
FTSE 100 Lags as Energy Stocks Retreat
London’s FTSE 100 underperformed its European peers and remained on course for a weekly decline of around 0.9%, weighed down by weakness in major energy companies including BP PLC (LSE:BP.) and Shell PLC (LSE:SHEL) following the drop in crude prices. The index opened 0.1% lower on Friday.
UK politics also attracted attention after Labour mayor Andy Burnham secured a parliamentary seat, a development viewed by some market participants as increasing the possibility of a future leadership challenge to Prime Minister Keir Starmer.
Airlines Benefit From Lower Fuel Costs
Airline stocks were among the strongest performers during the week as falling oil prices improved the outlook for operating costs. Shares in Lufthansa (TG:LHA), Air France-KLM (EU:AF) and British Airways owner ICAG (LSE:IAG) all advanced as investors welcomed the prospect of lower fuel expenses.
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