European shares fall as Middle East tensions weigh on sentiment

European shares fell on Friday and were on track to end the week lower, as investors remained cautious amid limited progress toward resolving the Middle East conflict.

Market participants also kept a close eye on corporate earnings for further direction.

The pan-European STOXX 600 index declined 0.5% to 611.04 points as of 0715 GMT.

The benchmark index was set to record a weekly loss of around 2.5%, snapping a four-week winning streak.

Most major regional markets followed a similar downward trend, reflecting broader investor caution.

Fragile sentiment despite diplomatic developments

Investor sentiment remained fragile despite some signs of diplomatic movement in the region.

Israel and Lebanon agreed to extend their ceasefire by three weeks after a White House meeting brokered by US President Donald Trump.

Trump said he was willing to wait for "the best deal" to end the conflict with Iran.

However, the broader conflict has now stretched to around eight weeks, with Washington and Tehran still at an impasse.

Markets have continued to swing between optimism and caution.

Investors have been hopeful that a breakthrough could be near, but concerns remain that tensions may persist for longer than expected, with little clarity on a resolution timeline.

Oil prices and supply concerns add pressure

Benchmark Brent crude remained above $100 per barrel, as the Strait of Hormuz stayed effectively shut.

This has raised concerns about global energy supply disruptions and added pressure on inflation expectations.

Elevated oil prices have further weighed on market sentiment, as investors assess the potential economic impact of prolonged supply constraints.

Sector performance mixed, defence stocks lead declines

Most sectors traded in negative territory during the session.

Aerospace and defence stocks led the losses, falling 2.4%.

In contrast, the technology sector stood out as the only major gainer, rising 0.7%.

The gains were driven by a sharp rally in shares of SAP, which surged 5.5% after the company reported first-quarter profit above estimates, supported by strong growth in its cloud business.

Germany’s DAX outperforms peers

Germany’s DAX index outperformed other major European benchmarks and edged up 0.1%.

The gains were largely supported by the strong performance of SAP shares.

Earnings resilience meets rising risks

European corporate earnings have so far shown relative resilience.

However, the outlook remains uncertain due to escalating geopolitical risks and rising oil prices.

Investors continue to weigh the impact of ongoing tensions in the Middle East alongside corporate performance.

The combination of geopolitical uncertainty and inflation concerns is expected to keep markets volatile in the near term.

Meanwhile, the euro remained relatively stable against major currencies on Friday, as investors balanced geopolitical risks with expectations around economic resilience in the eurozone.

Currency markets showed limited volatility, reflecting a wait-and-watch approach as traders assessed developments in the Middle East conflict and their potential impact on inflation and growth.

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