European shares slip after Middle East talks collapse

LONDON - European shares dropped on Monday as expectations of a swift resolution to the Middle East conflict faded following the breakdown of US-Iran negotiations and Washington's decision to impose a blockade around the Strait of Hormuz.

The pan-European index was down 0.7% at 610.44 points, as of 0718 GMT.

Regional bourses were also trading in negative territory, with Germany's DAX down 1%, while London's FTSE 100 fell 0.4%.

Investor anxiety escalated as the US announced preparations to blockade the strategic passage, threatening to choke off Iranian oil exports after diplomatic efforts between Washington and Tehran failed to produce any breakthrough in ending the ongoing war.

Rising tensions pushed oil prices above $100-per-barrel mark, reigniting inflation concerns that had only recently begun to subside.

The downturn follows a rally from last week, when the STOXX 600 gained 3% on optimism surrounding a temporary US-Iran ceasefire, helping recoup some losses since hostilities began on February 28.

Energy stocks were the gainers, rising 0.8%, on the back of soaring oil prices.

All other sectors tumbled into negative territory, and travel and leisure companies led losses with a 1.9% drop.

Banks and industrials also weighed heavily in the benchmark index, down 1.5% and 1%, respectively.

Investors are now bracing for a potential shift in policy from the European Central Bank, with expectations for interest rate hikes rather than a prolonged pause.

Markets are currently pricing in nearly three 25-basis-point rate increase by year-end, according to LSEG-compiled data.