Europe close: Oil sinks, equities rally on Iran peace hopes

(Sharecast News) - European shares surged on Wednesday while oil prices plunged after Iran suggested the Strait of Hormuz could reopen and US president Donald Trump paused an operation to protect shipping through the key waterway amid signs of progress towards a peace deal.

The pan-European Stoxx 600 rose 2.28% to 623.65.

Germany's DAX gained 2.24% to 24,949.25, France's CAC 40 jumped 3.18% to 8,318.53, and London's FTSE 100 advanced 2.15% to 10,438.66.

In commodities, Brent crude futures were last down 7.59% on ICE at $101.53 per barrel, while the NYMEX quote for West Texas Intermediate dropped 7.37% to $94.73.

Chris Beauchamp, chief market analyst at IG, said fresh headlines had driven equities higher and sent oil prices lower on hopes of some kind of conflict resolution.

"Once more stocks have found themselves jolted higher by reports of progress towards a fresh US-Iran agreement," he said.

"Traders quickly skimming headlines caused equities to make further strong gains, though a closer reading suggests that even an initial understanding will, initially, lead only to more talks.

"Still, any hint of fresh talks is enough to spark another manic round of buying, a sign of how keen investors are to see the end of this ill-conceived conflict."

Reuters, citing Iranian state media, reported that Iran's Islamic Revolutionary Guard Corps navy had said the Strait of Hormuz could reopen following the end of "threats from aggressors".

The IRGC navy said safe and stable transit through the waterway could be possible.

Trump said he was pausing "Project Freedom", his operation to protect ships moving through the strait, to enable a "complete and final agreement" with Tehran.

"Oil prices continue to trade like overhyped meme stocks, reacting frenetically to every headline," Beauchamp said.

"But the initial sharp drop has not been sustained, though the bearish bias of the past week is intact.

"It's still clear that both sides want a deal, it's just that actually hammering one out that can pass muster in Tehran and Washington is much easier said than done."

Patrick Munnelly, market strategy partner at TickMill, said the FTSE 100 had taken support from a broader recovery across global markets as investors grew more hopeful that progress towards a US-Iran deal could reduce the immediate geopolitical risk premium.

"After Tuesday's sharp HSBC-led decline, the UK benchmark was no longer trading in isolation - improving global risk appetite helped stabilise equities, softened the defensive tone, and encouraged investors to reassess whether the recent oil-driven inflation scare had gone too far," he said.

"The key macro driver was the possibility that a diplomatic breakthrough between Washington and Tehran could ease pressure on crude prices, reduce inflation anxiety and give central banks more room to remain patient.

"That mattered especially for UK assets, because the FTSE had been punished by the uncomfortable combination of higher oil, sticky inflation fears and doubts over the Bank of England's policy path."

Euro area economy back in contraction

Economic data was more cautious.

The eurozone economy slipped back into contraction in April, according to final S&P Global purchasing managers' index estimates, as weakening demand and rising prices pointed to stagflation risks.

The composite PMI fell to 48.8 from 50.7 in March, slightly above the preliminary estimate of 48.6 but below the 50 mark separating growth from contraction for the first time in 17 months.

The downturn was driven by services, where the PMI dropped to 47.6 from 50.2, its lowest level in more than five years.

New business fell for a second straight month, while manufacturing held up better, partly because of stockpiling rather than underlying demand.

Inflation pressures also intensified, with prices charged by firms rising at the fastest pace in three years and input costs at a 40-month high.

Chris Williamson, S&P Global's chief business economist, said the data confirmed "an economy slipping into decline during April as the ongoing war in the Middle East derails the recovery that had been building prior to the outbreak of the conflict".

In the UK, the services sector returned to stronger growth in April despite the Middle East crisis driving a sharp rise in input costs.

The S&P Global UK services PMI business activity index rose to 52.7 from March's 11-month low of 50.5, ahead of expectations for 52.0.

The composite PMI increased to 52.6 from 50.3, also above forecasts.

However, firms cited global supply shortages, higher borrowing costs and rising inflationary pressures as headwinds to business and consumer demand.

Input price inflation rose at the fastest pace since November 2022, with 57% of respondents reporting higher average cost burdens, up from 40% in March.

Tim Moore, economics director at S&P Global Market Intelligence, said April showed "a modest recovery in the UK service sector output" but warned that the improvement could prove short-lived because new business remained subdued and inflation pressures were escalating.

Travel and aerospace stocks rally on peace hopes, oil plays sink

In equities, travel and aerospace stocks rallied on hopes of peace and lower jet fuel prices.

Ryanair rose 9.91%, easyJet gained 8.86%, TUI advanced 7.21%, Rolls-Royce climbed 7.31% and MTU Aero Engines jumped 11.16%.

Oil stocks fell sharply in line with the weaker crude price.

Equinor dropped 8.71%, Vår Energi lost 6.35%, Aker BP fell 7.31%, Repsol declined 4.36%, TotalEnergies slipped 3.35%, Eni was down 4.15%, BP fell 3.72% and Shell lost 3.05%.

Elsewhere, Demant surged 13.28% after Nordea raised its target price on the Danish hearing aid maker to DKK 250 from DKK 240, while Sydbank upgraded the stock to 'buy' from 'hold'.

Pandora jumped 14.31% after the Danish jeweller reported first-quarter growth in line with expectations and confirmed its full-year targets.

Novo Nordisk rose 2.48% and BMW gained 5.41% after results.

Reporting by Josh White for Sharecast.com.