Global Markets | European shares log second week of losses as Mideast war fuels inflation fears

European sharesextended their declines on Friday and marked their second consecutive weekly loss, as the escalating conflict in the Middle East and inflation worries dented risk appetite.

The pan-European benchmark STOXX 600 closed 0.5% lower. All major regional bourses were in the red, posting marginal weekly falls.

Industrial stockswere the biggest drags ‌on the index, down ⁠1.8%, ⁠with Siemens Energy down 5.7% and Rolls-Royce off 5.3%.

Miners experienced the biggest percentage loss, down 3.3%, as prices of silver tumbled over 3%, copper fell over 1% and gold prices also ticked lower.

Global markets extended declines this week as the U.S.-Israeli war on Iran approached the two-week mark. U.S. President Donald Trump said the U.S. was going to be hitting Iran “very hard over the next week”, prompting markets to brace for a drawn-out conflict and reassess interest-rate expectations as energy-driven inflation concerns resurfaced.

Pascal Koeppel, chief investment officer at Vontobel SFA Investment ⁠Management, said ‌that both Iran and the U.S. had interests in stopping the war. Iran’s interest is in re-opening the Strait of Hormuz, he said, while for the U.S. a priority is reining ⁠in mounting defence costs before the midterm elections in November.

“It’s short term in nature and the impact on inflation and rates is not as big as market fear. But at the moment, the fear is larger so the European markets are correcting,” he said.

Markets have priced in one quarter-point interest-rate hike by the European Central Bank by the end of the year and see a nearly 75% chance of another similar-sized move, per data compiled by LSEG. This contrasts with expectations earlier in the year that a rate cut was coming.

Oil prices were about 1% ‌higher on Friday, as it became clear that the Strait of Hormuz remained closed.

Energy stocks far outperformed others this week with a gain of nearly 5%. Economically sensitive banks fell again, dropping 1.2%. Standard Chartered and HSBC, the ⁠two global banks most exposed to the war with Iran according to Reuters analysis, extended their monthly declines to over 15% each. Data showed harmonised inflation in France rose 1.1% year-on-year in February, while the British economy grew by 0.2% in the three months to January, below expectations. Among individual moves, BE Semiconductor Industries shares jumped 5.6% after the chip-equipment maker fielded takeover interest, Reuters reported. Berkeley Group cautioned that the conflict in the Middle East was weighing on risk sentiment, while reaffirming its annual profit outlook, sending shares of the home builder 1.5% lower.

Zalando climbed about 7% after Bernstein upgraded the online fashion retailer to “market perform” from “underperform.”