European stock markets recorded their most significant drop since last November, as escalating conflict in the Middle East prompted investors to sell off risk assets. The Stoxx Europe 600 index closed down 1.6%. The energy sector bucked the trend, supported by oil prices posting their largest increase in four years and European natural gas prices surging more than 50%. Shares of Shell and TotalEnergies both rose over 2%. Analysts at JPMorgan advised investors to buy European oil and gas stocks, citing rising supply risks in the Gulf region.
Automotive stocks were among the worst performers, pressured by rising energy costs. Travel and leisure stocks also underperformed due to severe disruptions in Middle East transportation. Shares of Lufthansa and Air France-KLM fell 5.2% and 9.4%, respectively.
The UK's FTSE 100 index declined 1.2%, with its exposure to defensive sectors and energy stocks helping it outperform other regional benchmarks. Strategists at Citigroup upgraded UK equities to overweight, viewing them as an effective hedge against geopolitical turmoil. Meanwhile, European credit risk indicators moved higher on Monday.
The sell-off in European markets followed a weekend escalation of tensions between the U.S. and Iran into open conflict. U.S. President Donald Trump stated that airstrikes against Iran would continue until objectives are met and called on Iranian leaders to surrender.
