Europe close: Stocks fall, bond yields rise as investors hope for Iran deal

(Sharecast News) - European shares extended losses on Friday and government bond yields rose across the continent, as investors weighed the risk that the energy crisis caused by the Iran war will keep inflation and interest rates higher for longer.

The pan-European Stoxx 600 fell 1.6% to 606.20.

Germany's DAX dropped 2.05% to 23,955.19, France's CAC 40 lost 1.6% to 7,952.55, and London's FTSE 100 declined 1.71%.

In commodities, Brent crude futures were last up 3.67% on ICE at $109.60 a barrel, while the NYMEX quote for West Texas Intermediate gained 4.35% to $105.57.

"Stock indices around the globe fall amid increasing concerns about the impact of the prolonged closure of the Strait of Hormuz," said Axel Rudolph, chief technical analyst at IG.

"A sea of red greeted stock investors on the last day of the week as the oil price is on track for a weekly gain of over 5% and European gas prices hit a five-week high," he added.

"Heightened concerns of a prolonged shut down of the Strait of Hormuz following president Trump's blasé comments on the matter also pushed the US 10-year Treasury yield to a one-year high at 4.57%.

"US industrial output growth rising to a 14-month high and New York manufacturing activity increasing the most in over four years helped stem the flow late in the day."

Gilt yields rose after Greater Manchester mayor Andy Burnham was given a potential route back to parliament, allowing him to challenge for the Labour leadership.

Formerly blocked from returning to Westminster, Burnham would now be able to contest a by-election in Makerfield after sitting MP Josh Simons said he would stand aside.

Burnham, seen by bond market "vigilantes" as a threat to fiscal prudence, previously said the UK is "in hock to the bond markets".

"The 10-year UK gilt yield surged to 5.16% - to levels last seen during the 2008 financial crisis - on news that the left-leaning mayor of Greater Manchester Andy Burnham may challenge prime minister Keir Starmer's leadership," Rudolph said.

"The pound slid to a five-week low around $1.3350 with traders now anticipating roughly 70 basis points of Bank of England rate hikes this year to offset inflationary pressures caused by the situation in the Middle East."

UK gilts were already under pressure because of Britain's exposure to inflation and energy costs, but German, Italian and French bonds also sold off as investors worried about price pressures linked to the Iran war.

Health secretary Wes Streeting, viewed as the main right-wing challenger to prime minister Starmer, quit his post but stopped short of triggering a leadership ballot.

Under Labour rules, any candidate needs the support of 81 MPs to run.

"UK equities were firmly on the back foot Friday, with the FTSE 100 down 1.8%, on course to end a two-day winning streak as investors marked up domestic political risk and imported inflation risk at the same time," noted Patrick Munnelly, market strategy partner at TickMill.

"The immediate catalyst was growing speculation that Greater Manchester mayor Andy Burnham could position himself for a leadership challenge to prime minister Keir Starmer after announcing plans to contest an upcoming parliamentary vacancy," he added.

"For markets, the issue is not simply leadership drama - it is the potential fiscal direction of a post-Starmer Labour Party."

Munnelly said Burnham's pitch of "business-friendly socialism" may be designed to reassure corporates, but that investors were focused on the potential implications for spending and borrowing.

In Beijing, talks between US president Donald Trump and his Chinese counterpart Xi Jinping had yet to deliver a meaningful breakthrough, beyond agreement that both wanted an end to the US war with Iran and the reopening of the Strait of Hormuz.

China, Iran's largest oil customer, had been hit by the US blockade of shipments.

Oil prices rose after Trump said China had agreed to buy oil from the US.

"They've agreed they want to buy oil from the United States, they're going to go to Texas, we're going to start sending Chinese ships to Texas and to Louisiana and to Alaska," he told Fox News.

China had not confirmed the claim.

NY state manufacturing activity grows strongly

In economic news, there was a lack of European data releases, but across the Atlantic, manufacturing activity in New York State grew at its strongest pace in more than four years.

The New York Fed's Empire State manufacturing survey showed the general business conditions index rising to 19.6 in May, its highest since April 2022 and well above expectations for 7.5.

New orders rose to 22.7, shipments remained positive at 18.9, and the six-month outlook index climbed to 33.5.

However, inflation pressures also intensified.

The New York Fed said prices paid and input price indices were at their highest levels since 2022, while delivery times and supply availability worsened.

Richard Deitz, economic research advisor at the New York Fed, said new orders and shipments had risen strongly and employment continued to increase, but "the pace of price increases surged".

Miners in the red, Dino Polska jumps on better-than-expected Q1

In equity markets, mining stocks were among the worst hit.

Antofagasta fell 8.55% and Fresnillo dropped 9.44% as gold sold off and oil prices rose, with hopes of a breakthrough in Middle East peace talks fading.

Munnelly said sector performance reflected the breadth of the risk-off move.

"Metal miners fell 5.0%, hit by the lack of China optimism and broader de-risking, while utilities dropped 4.9% as higher yield sensitivity, political risk and regulatory concerns converged."

On the upside, Dino Polska bucked the weaker trend, surging 9.98% after the Polish supermarket chain's first-quarter results beat estimates.

Magnum Ice Cream Company rose 8.67% in Amsterdam after reports that Blackstone and CD&R were among the firms considering a private equity approach for the group, which was spun out of Unilever late last year.

Reporting by Josh White for Sharecast.com.