Reported by Singular Bank
European stock markets have taken a sharp downturn after Donald Trump declared an end to the ceasefire with Iran. This development has brought back a risk premium to the market that had eased in recent sessions: the Ibex 35 fell by around 2.7 per cent, the Euro Stoxx 50 lost around 1.8 per cent and Wall Street also opened lower, albeit with more moderate declines.
The reaction was not simply a case of profit-taking. The surge in Brent crude reached $80 per barrel after rising by nearly 8% during the session, reigniting fears of further inflationary pressure, hitting energy-intensive sectors, travel, consumer discretionary and banks particularly hard. In Spain, the financial sector’s weighting in the Ibex is amplifying the decline.
The key event of the session was Trump’s announcement that the ceasefire with Iran was over, following fresh US attacks and incidents involving merchant ships near the Strait of Hormuz. The news shattered the narrative of de-escalation that had underpinned risk assets in recent weeks.
The market is once again following the classic playbook for escalation in the Middle East: oil and gas prices rising, share markets falling and bonds rebounding amid fears of more persistent inflation.
A complete closure of the Strait of Hormuz has not yet been priced in, but there is a greater likelihood of disruptions, attacks or sanctions that would drive up energy costs. That distinction is important: we are not facing a fully materialised supply shock, but rather a risk premium that is being abruptly re-priced into markets.
Fixed income has come under selling pressure in Europe and the United States. Unlike during other periods of geopolitical tension, bonds have not acted as a clear safe haven because the trigger has been a surge in oil prices that raises the risk of inflation.
The yield on the 10-year German Bund has stood at around 3.09 per cent, rising by 10 basis points during the session. In Spain, the yield on the 10-year bond has risen to 3.59 per cent, up 11 basis points.
In the United States, the yield on the 10-year Treasury has risen towards 4.59 per cent, its highest level in recent weeks.
Brent crude has risen by nearly 8 per cent and is trading at around $80 per barrel. The new attacks and the deterioration in relations between the United States and Iran have reignited concerns over supply from the Gulf.
Gold has not led the flight to safety because the rise in yields and the strength of the dollar are offsetting some of the geopolitical impact, causing it to fall to $4,030.
In the foreign exchange market, the dollar remains firm against the euro, with the EUR/USD exchange rate at 1.14.
