Europe's STOXX 600 slide to two-week lows on Middle East escalation; banks, travel hit

European Markets React to Middle East Escalation

By Pranav Kashyap and Avinash P

March 2 (Reuters) - European stocks sank to a two-week low on Monday as the Middle East conflict showed no signs of cooling, triggering a broad-based selloff that left most of the sectors in the red.

The pan-European STOXX 600 fell 1.5% to 623.98 points by 0451 GMT, its lowest since mid-February, putting the index on track for its worst day in more than seven months and dragging it away from the record high hit on Friday.

Germany's stocks slid to an over three-week low, France fell to a near two-week low and Spain dipped to its weakest level in more than two weeks.

Geopolitical Tensions and Market Impact

Fresh military strikes by the United States and Israel on Iran continued after weekend attacks that killed Iran's Supreme Leader Ayatollah Ali Khamenei, prompting Tehran to launch missile barrages across the region and raising fears the conflict could widen and potentially draw in neighbouring countries.

"The coordinated attacks by Israel and US on Iran are explicitly aimed at regime change and will likely last much longer than the limited action seen in 2025, when Brent briefly exceeded 80US$/barrel" said Paolo Zanghieri, senior economist, Generali Investments.

Banking Sector Under Pressure

Bank shares took some of the heaviest punches. UK lenders were among the hardest hit, given their exposure to the Middle East, with HSBC, Barclays and Standard Chartered down 4% to 5%. The broader banking index dropped 3.6%, while insurers slid 2%.

Travel and Consumer Sectors Suffer Losses

Airlines and travel stocks were hammered as well, hit by airspace closures and suspended routes to the Middle East, a key global aviation corridor. The sector dropped to its lowest since mid-November and was on course for its biggest daily loss since April.

Lufthansa tumbled as much as 11%, while British Airways owner ICAG and Air France KLM lost 5% and 7%, respectively.

Consumer-facing names also buckled. Luxury groups such as LVMH and Kering fell 4%, while the broader retail sector shed 3.6%.

Export-Heavy Companies and Supply Chain Concerns

Export-heavy European companies were swept up in the downdraft as investors priced in fresh supply-chain headaches. With maritime routes under pressure, shippers face higher freight costs, longer detours and knock-on delivery delays.

Market Volatility and Investor Sentiment

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.

With Trump signaling the conflict could drag on, Europe's volatility gauge, the STOXX volatility index, spiked to its highest level since mid-November.

Sector Performance Amid Escalation

Energy, Defences, and Shipping Shine

ENERGY, DEFENCES, AND SHIPPING SHINE

Energy shares surged as oil prices jumped as much as 13% after Iranian attacks disrupted shipping through the vital Strait of Hormuz. Shell, BP and TotalEnergies all gained between 2% and 4%, lifting the energy index 2.2% higher, to a record-high.

Defense and Shipping Stocks Benefit

Defense stocks also caught a bid. BAE Systems, Rheinmetall, and Leonardo climbed between 2% and 6%. The broader defense sector, which surged nearly 60% in 2025, rose 0.2% as the escalation fueled expectations of increased U.S. defense spending.

Shipping names strengthened too, as the turmoil threatened to snarl both Hormuz and Suez routes, tightening vessel capacity and lifting expectations for freight rates. Maersk and Hapag-Lloyd gained 4.5% each.

Defensive Sectors and Market Outlook

Defensive sectors, such as utilities, often traded as bond proxies, were marginally lower, and consumer staples such as Nestle was little changed.

Upcoming Economic Data and Regional Performance

Investors also have a busy data calendar to navigate this week, including key inflation releases across the bloc, consumer and producer prices, alongside the unemployment rate, PMI readings and retail sales.

PMI Surveys and Economic Signals

PMI surveys showed France's and Italy's manufacturing sectors expanding in February, while Germany's showed signs of recovery.

(Reporting by Avinash P and Pranav Kashyap in Bengaluru; Editing by Rashmi Aich and Vijay Kishore)