European Stocks Decline on Geopolitical Tensions, Fed Rate Hike Expectations

European stocks retreated on Tuesday, trading near multi-month lows as investors navigated a combination of rising geopolitical risks in the Middle East, elevated government bond yields, and anticipation of a key U.S. Federal Reserve policy decision.

By early trading, the pan-European Stoxx 600 index was down 0.4%, according to figures from Investing.com. Major regional bourses also posted losses:

• Germany’s DAX fell 0.2%
• France’s CAC 40 declined 0.4%
• The UK’s FTSE 100 was down 0.4%
• Italy’s FTSE MIB dropped nearly 1.0%

Middle East Conflict Fuels Oil Surge

Heightened tensions in the Middle East pushed energy prices higher, adding to inflationary concerns. Brent crude futures gained another 1.2% to trade above $113 a barrel, extending a multi-week rally.

The move followed reports that Riyadh formally blamed Iran-backed elements for a strike on Saudi Arabia’s East-West pipeline, with Saudi officials warning the disruption could affect up to 4% of global oil supplies. Further attacks by Yemen's Houthi militants on Saudi territory also weighed on market sentiment, according to the source report.

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Fed Meeting and Bond Yields in Focus

Investor caution was compounded by the start of the U.S. Federal Reserve's two-day monetary policy meeting. Financial markets are pricing in a 90% probability of a 25 basis point interest rate hike on Wednesday, which would be the central bank's first increase since mid-2023.

This follows the European Central Bank's recent quarter-point rate hike to 2.50%. Persistently high inflation expectations have kept sovereign bond yields elevated, with the benchmark U.S. 10-year Treasury yield near 4.98% and Germany’s 10-year Bund yield holding at 3.51%, increasing borrowing costs and pressuring equity valuations.

Sector Pressures and Economic Data

Beyond macroeconomic drivers, the technology sector faced headwinds after leaders from OpenAI and Anthropic called for a temporary pause on advanced AI development to establish safety standards. Investors are also awaiting the release of Germany's ZEW Economic Sentiment index later in the session for fresh insights into business confidence in the Eurozone's largest economy.