European stocks suffer biggest drop in months as Middle East tensions hit banks, travel
By Pranav Kashyap, Avinash P and Purvi Agarwal
March 2 (Reuters) - European stocks clocked their biggest one-day decline in three months on Monday, swept up in a global sell-off in risk assets as the U.S.-Israeli war against Iran expanded with no end in sight.
The pan-European STOXX 600 .STOXX closed down 1.7%, at its lowest level in more than two weeks, after closing at a record high on Friday.
After a weekend bombing that killed Iran's supreme leader Ayatollah Ali Khamenei, the country launched retaliatory attacks on U.S. bases in Gulf states, raising fears that the conflict could widen and draw in more countries in the region.
Though the Pentagon downplayed concerns of the U.S. plunging into an open-ended conflict, President Donald Trump said in a CNN interview that a "big wave" was yet to come in the war.
Europe's volatility gauge, the STOXX volatility index .V2TX, spiked to its highest level since mid-November.
"We expect a short, hard-hitting regional conflict, which should offer likely signals to help investors know if a larger conflict is developing," said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute.
"Past violent flareups in the Middle East moved markets towards risk aversion, but sentiment rebounded quickly once it was clear that the conflict was subsiding and regional oil flow would continue."
Banks .SX7P took the biggest hit, down 3.2%, with heavyweights HSBC HSBA.L, Santander SAN.MC and Allianz ALVG.DE down between 3% to 5%.
Spain's financial-heavy index .IBEX marked its steepest one-day fall since the tariff shock in April, while Germany's .GDAXI saw its worst since August.
Industrials .SXNP and consumer discretionary stocks such as luxury companies .SXRP, .SXQP fell 1% and 3% respectively, as investors priced in potential supply chain disruptions for these export-heavy companies.
ENERGY, DEFENCES, AND SHIPPING SHINE
The energy sector .SXEP hit a record high and was the only one trading higher, tracking oil prices that jumped as much as 13% after Iranian attacks disrupted shipping through the vital Strait of Hormuz. European natural gas prices shot up 50%, after major LNG exporter QatarEnergy halted production.
Shell SHEL.L, BP BP.L and TotalEnergies TTEF.PA gained between 2% and 3%.
The higher prices, alongside airspace closures and suspended routes to the Middle East, a key global aviation corridor, hammered travel and leisure stocks .SXTP. Lufthansa tumbled 5.2%, while British Airways owner IAG ICAG.L and Air France KLM AIRF.PA lost 5.5% and 9%, respectively.
The conflict raised prospects of a rise in demand for defence equipment, sending BAE Systems BAES.L and Leonardo LDOF.MI higher, and the broader defence sector .SXPARO up 0.3%.
Shipping names strengthened too, as tightening vessel capacity lifted expectations for freight rates. Maersk MAERSKb.CO and Hapag-Lloyd HLAG.DE gained 7.9% and 6.4% respectively.
The geopolitical jolt hit as markets were recovering from a choppy February, due to uncertainty around AI-related spending and disruption, revived tariff worries and persistent geopolitical tension, keeping risk appetite on a short leash.
Economic data releases including consumer and producer inflation could take a back seat this week. A survey showed on Monday, euro zone manufacturing expanded at its fastest pace in nearly four years last month.
