By Avinash P and Johann M Cherian
March 26 (Reuters) – European shares fell on Thursday as investors grappled with the prospect of an imminent rate hike by the European Central Bank and dimming hopes for a quick end to the Middle East conflict.
The pan-European STOXX 600 fell 1.3% to 579.60 points by 0942 GMT, and was set to break a three-day win streak.
Policymaker Joachim Nagel told Reuters that the ECB has “an option” to raise interest rates at its April meeting, a day after President Christine Lagarde said that the central bank was prepared to act at any meeting to keep inflation at its 2% target.
Short-term European bond yields, a reflection of interest rate expectations, rose and pressured equities, while interest rate futures reflect a more than 65% chance of a rate hike in April, according to LSEG-compiled data.
Industrials and banks, cyclical sectors that are vulnerable to economic downturns, were down about 1% each and were the biggest drags on the benchmark.
“There’s a challenge for investors today, which is to try and understand the duration of the conflict and the ultimate goal that could drive an off-ramp or a resolution in that scenario.” said Craig Cameron, portfolio manager at Templeton Global Equity Group.
Uncertainty about a resolution to the month-long conflict prevails following contradictory remarks about a ceasefire by U.S. President Donald Trump and Iran.
Europe is particularly vulnerable to surging crude prices as the Strait of Hormuz remains shut, fanning inflationary and growth concerns. The STOXX index is down more than 8% since the war on Iran started and is on the cusp of confirming a correction.
An index correction is a 10% drop from all-time highs on a close-to-close basis.
“Higher rates are definitely going to weigh on stocks and that’s been part of that decision factor that we’ve seen over in recent weeks” Cameron added.
Miners led sectors lower, with Boliden falling 18% after saying its core quarterly earnings will take a hit from abnormally high seismic activity at its Garpenberg mine. Sliding metals prices also weighed on the broader sector.
Elevated crude prices pressured airlines, with Air France and Lufthansa down more than 1% each.
LPP jumped 6.2% after the fashion retailer reported fourth-quarter results that beat expectations.
Swedish fashion retailer H&M slipped 5.3% as quarterly sales missed expectations, while Next added 5.4% after slightly raising its annual profit guidance.
Edenred tanked 15% after the Italian competition regulator launched an investigation into the group and its Italian unit, citing possible abuse of its dominant position in the country’s employee meal voucher market.
(Reporting by Avinash P and Johann M Cherian in Bengaluru; Editing by Sonia Cheema and Devika Syamnath)
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