European Shares Post Worst Day Since March as Geopolitical Tensions Rise

European shares experienced their sharpest single-day decline since mid-March on Wednesday, as fresh geopolitical uncertainty unsettled investors. The pan-European STOXX 600 index closed down 1.8%, its lowest point in a week. The drop was largely attributed to comments from U.S. President Donald Trump casting doubt on peace prospects in the Middle East, alongside reports of U.S.-Iran strikes and the re-imposition of U.S. sanctions on Iranian oil, which rekindled worries about oil prices and inflation.

Spanish equities were particularly hard-hit after President Trump stated he had ordered the Treasury Secretary to "cut off all trade with Spain," which he called a "terrible partner." In response, Spain’s IBEX index plunged 2.7%, marking its worst performance since early March and making it the biggest loser among the region's major bourses.

The sell-off was broad across most sectors. Basic resources, construction, and materials stocks saw significant losses of 4.4% and 3.7%, respectively. The auto sector also slipped by 3.7%. In contrast, the energy sector gained 1.9% as crude oil prices jumped on the renewed tensions. The higher fuel costs weighed on airline stocks, with Air France and Wizz Air declining 6.6% and 5%, respectively.

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The day's events also shifted expectations regarding monetary policy. Following a period where signs of softer inflation had led markets to pare back bets on further interest rate hikes from the European Central Bank, traders are now pricing in more aggressive action. According to LSEG-compiled data, expectations for ECB hikes this year have risen from 25 basis points to approximately 42 basis points.