European markets turned cautious on Tuesday as renewed U.S. military strikes in southern Iran interrupted a recent rally driven by hopes that Washington and Tehran were moving closer to a deal that could ease one of the biggest geopolitical shocks to hit global markets this year.
The pan-European STOXX 600 slipped 0.2% by mid-morning trading in Europe, pulling back modestly from levels near its highest point since the U.S.-Israel war on Iran erupted in late February. Investors had spent much of the previous week pricing in a possible de-escalation that could reopen disrupted energy flows through the Strait of Hormuz and reduce inflation pressures tied to surging oil prices.
That optimism weakened after Washington confirmed what it described as defensive strikes in southern Iran, reviving fears that negotiations could still unravel even as diplomatic contacts continue.
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U.S. Secretary of State Marco Rubio said on Tuesday that negotiations with Iran may still “take a few days,” underscoring the fragile and uncertain nature of the talks. He also said, “The straits have to be open, they’re ?going to ?be open one way or ?the ?other, so they need to be open,” which has been interpreted as meaning that the U.S. may be planning more strikes.
The mixed reaction across European markets reflected how investors are struggling to price the next phase of the conflict. London’s FTSE 100 rose 0.7%, helped by gains in energy and commodity-linked companies that tend to benefit from higher crude prices, while Germany’s DAX fell 0.7% amid pressure on industrial and export-oriented shares vulnerable to energy shocks and slowing trade flows.
The broader MSCI World Equity Index was little changed on the day but remained up 3.8% for the month, highlighting how global equities have steadily recovered from the sharp selloff triggered by the outbreak of the conflict earlier this year.
Peter Schaffrik, global macro strategist at RBC Capital Markets, said markets were struggling to interpret rapidly shifting political and military signals from Washington.
“It went from agreement is near to everyone needs to sign the Abraham Accords to bombing, so it’s not entirely clear what’s going on there,” Schaffrik said, referring to comments by Donald Trump urging additional countries to join the Abraham Accords while simultaneously warning Iran of possible escalation.
Oil markets again became the clearest barometer of geopolitical anxiety.
Brent crude climbed 3.6% to $99.64 a barrel, moving back toward the psychologically important $100 level after having retreated sharply from late-April highs above $120. U.S. West Texas Intermediate traded at $93.09 a barrel.
Energy markets have swung violently in recent months as traders attempt to gauge the risk of prolonged disruption to Middle Eastern supply routes. The Strait of Hormuz remains central to that calculation because roughly one-fifth of global oil consumption passes through the narrow waterway.
Even with Tuesday’s gains in crude prices, some investors still believe a diplomatic breakthrough remains possible. Brent prices remain well below the peaks seen earlier in the conflict, suggesting markets continue to assign some probability to an eventual reopening of shipping lanes and stabilization in regional exports.
The conflict has become increasingly important for central banks as elevated oil and natural gas prices filter through into transportation, manufacturing, and consumer costs.
Isabel Schnabel told Reuters the European Central Bank should still raise interest rates in June even if negotiations with Iran ultimately succeed, arguing that the war has lasted longer than policymakers initially expected and that higher energy costs are already spreading through the broader economy.
Her comments supported market expectations for tighter monetary policy in Europe. Money markets are now pricing in roughly a 90% probability of a June rate increase by the ECB.
The prospect of prolonged inflationary pressure helped push European government bond yields higher on Tuesday, although benchmark German 10-year yields remained near seven-week lows after falling sharply last week as fears of an extended energy shock briefly eased.
Currency markets were comparatively calm. The dollar index was little changed at 99.081, while the euro slipped slightly to $1.1636. The Japanese yen weakened modestly against the dollar.
Gold prices, which had rallied strongly during the height of the conflict as investors sought safe-haven assets, fell 1.1% to around $4,522 an ounce as some traders rotated back into risk assets and trimmed defensive positions.
The broader market reaction indicates investors are no longer trading solely on fears of a regional war spiraling into a global energy crisis. Instead, markets are increasingly oscillating between expectations of diplomacy and renewed military escalation, producing sharp swings across oil, equities, bonds, and currencies.