European shares dive as Mideast tensions, US involvement fears weigh

By Purvi Agarwal, Ragini Mathur and Pranav Kashyap

(Reuters) -European shares skidded to an over one-month low on Thursday as escalating Middle East tensions and fears over potential U.S. involvement rattled investors.

The pan-European STOXX 600 closed down for the third consecutive day with a 0.8% drop to its lowest level since May 9.

Trading volumes remained thin as U.S. markets were shut for a public holiday.

The week-old Iran-Israel conflict showed no signs of de-escalation.

Meanwhile, U.S. President Donald Trump kept markets guessing about American involvement in air strikes on Tehran.

Markets were hopeful of talks between the U.S. and Iran, and between the European Union and Iran on Friday, leading to a potential de-escalation in tensions.

Much of the recent nervousness has been in markets centred around crude oil supply shocks, triggered by tensions in the oil-rich Middle East.

Oil prices rose on the day and boosted the energy sector by 0.8%, emerging as the session's top performer.

Healthcare and utilities were the only other sectors in the green.

Conversely, travel and leisure stocks led broader declines and finished 2.3% lower, taking a hit from the soaring oil prices.

"When the main channel is through energy prices, you see some risk aversion and that's what we're seeing across European equities and that explains the subdued performance," said Lilian Chovin, head of asset allocation at Coutts, referring to the Middle East tensions.

UNPREDICTABLE POLICIES

European central bank decisions this week showed how Trump's unpredictable trade policies are complicating monetary policy.

The Bank of England kept rates on hold, as expected, but flagged risks from a weaker labour market and higher energy prices.

Britain's FTSE 100, which houses energy giants such as BP and Shell, lost 0.6%.

The Swiss National Bank cut rates to zero as expected, while Norway's central bank delivered a surprise 25 basis-point cut, its first reduction in five years.

Stocks in Oslo were up 0.7%.

The Euro STOXX Volatility index touched its highest level since May 23 and was at 24.94.

Fed Chair Jerome Powell said on Wednesday that inflation in goods prices is expected to go up over the summer as Trump's tariffs work their way to consumers.

The mixed signals did not offer markets much clarity on how the Fed plans to navigate the uncertain economic environment.

EU officials are increasingly resigned to a 10% rate on "reciprocal" tariffs being the baseline in any trade deal between the United States and the EU, five sources familiar with the negotiations said.

"We understand Trump's reaction function and the constraints that apply to him and so investors are better able to form forward-looking views compared to two months ago," Chovin added.

Shares in recruitment companies in Europe slid after British recruiter Hays' forecast a more than 57% drop in annual operating profit.

Rival firms Randstad RAND.AS, Robert Walters and Adecco fell over 4.5% each.

Among stocks, Stora Enso jumped 14.7% to top the STOXX 600 after the Finnish forestry group said it was initiating a strategic review of its Swedish forest assets.

(Reporting by Purvi Agarwal in Bengaluru; Editing by Sonia Cheema, Nivedita Bhattacharjee and Ed Osmond)