European Stocks Slip as Mideast Tensions, ECB Rate Hike Expectations Weigh on Markets

European stocks edged lower on Monday as traders weighed the combined pressures of rising geopolitical risk in the Middle East and expectations for an imminent interest rate hike from the European Central Bank.

The pan-European STOXX 600 index declined by 0.1%, holding near multi-week lows, while major regional benchmarks like Germany’s DAX and France’s CAC 40 traded in narrow ranges as market participants avoided significant new positions.

Geopolitical Risks Drive Oil Higher

Market sentiment soured following reports that Iranian authorities plan to declare a restricted maritime zone near the Strait of Hormuz. This development follows a weekend escalation where U.S. forces reportedly disabled three Iranian oil tankers in retaliation for an alleged missile attack on two U.S. Navy warships by the Islamic Revolutionary Guard Corps (IRGC).

The friction in one of the world's most critical energy chokepoints pushed crude oil prices higher, with Brent crude rising another 1% on Monday. This builds on a nearly 10% surge last week that sent the benchmark above $90 a barrel. Any disruption to the Strait of Hormuz, which handles approximately 20% of global seaborne oil and gas, threatens to reignite inflation and raises concerns about a stagflationary shock to Europe's industrial sector.

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ECB Policy and U.S. Inflation in Focus

Compounding the geopolitical headwinds, investors are positioning for Thursday's European Central Bank monetary policy meeting. Money markets have almost fully priced in a 25-basis-point interest rate increase, according to Investing.com.

This hawkish outlook is driven by preliminary data showing Eurozone inflation accelerated to 3.3% in August, largely due to a 14.3% jump in energy prices. The expectation of higher rates has kept government bond yields elevated, with German 10-year Bunds near multi-year highs, compressing the appeal of equities and raising borrowing costs for businesses.

Beyond Europe, market participants are closely watching for a key U.S. Consumer Price Index (CPI) report scheduled for later in the week. The inflation data is seen as a critical factor for the Federal Reserve's upcoming policy decision, particularly after a stronger-than-expected U.S. jobs report for August.