(Bloomberg) -- European stocks dropped, erasing earlier gains, after the US said it has indications that Iran is preparing an imminent attack on Israel.
The Stoxx Europe 600 Index fell 0.4% to 520.88 at the close in London, having earlier risen as much as 0.5%. British stocks outperformed, with the FTSE 100 up 0.5%, the only major European market in the green. Energy stocks rose, as the warning, delivered by a senior White House official, lifted oil prices, while defense stocks also rallied.
Declines were led by banks and consumer stocks, with the Stoxx 600 Banks Index suffering its worst daily loss in two months.
“Should Iran enter a war directly, rather than through proxies, it’s a significant change and will lead many to question their positioning,” said Patrick Armstrong, chief investment officer at Plurimi Wealth LLP.
Armstrong expects the the Federal Reserve to continue cutting interest rates, and sees consumer-driven growth bolstering markets in the fourth quarter. Still, “a worsening and broadening of the conflict could disrupt this base case,” he said. He owns significant positions in defense and energy equities as a hedge against this risk.
In Europe, economic data is reinforcing the view that the European Central Bank can loosen monetary policy more speedily. A report Tuesday showed consumer prices rose 1.8% last month in the euro area, down from 2.2% in the previous month, slowing below the ECB’s 2% target for the first time since 2021.
“The stars are all aligned for the data-dependent Governing Council to pull the trigger on another rate cut, just five weeks after the previous policy meeting,” Michael Brown, a strategist at Pepperstone Group Ltd., wrote in a note.
European stocks typically gain in the fourth quarter, but face risks from the prospect of an all-out war in the Middle East as well as the upcoming corporate earnings season.
Among single stocks, Covestro AG shares jumped after Abu Dhabi National Oil Co. reached a deal to buy the chemical producer. Kering SA shares fell after the Gucci owner was cut to sell at Goldman Sachs.
In the US, stocks slid due to the political tensions and after job openings rose in August to a three-month high. A separate report published Tuesday by the Institute for Supply Management showed manufacturing activity contracted in September for a sixth straight month.
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--With assistance from Michael Msika.
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