Europe close: Stocks fall on UK political turmoil, oil prices

(Sharecast News) - European shares closed lower on Tuesday as political pressure on UK prime minister Sir Keir Starmer hit London assets, while renewed doubts over the fragile US-Iran ceasefire pushed oil prices higher.

The pan-European Stoxx 600 fell 1.05% to 606.34.

Germany's DAX declined 1.54% to 23,974.67, France's CAC 40 lost 0.95% to 7,979.92, and London's FTSE 100 edged down 0.04% to 10,265.32.

In commodities, Brent crude futures were last up 3.44% on ICE at $107.79 per barrel, while the NYMEX quote for West Texas Intermediate gained 3.68% to $101.68.

"It's been a tough day for markets on both sides of the Atlantic as US inflation rises higher than had been expected and the cost of UK government borrowing ratchets up amidst ongoing political uncertainty," said Danni Hewson, head of financial analysis at AJ Bell.

UK assets came under pressure after Starmer refused to resign despite growing calls from senior cabinet ministers, including foreign secretary Yvette Cooper, for him to stand down following Labour's heavy losses in last week's local council elections.#

The political uncertainty sent bond yields higher and the pound lower.

Starmer said he took responsibility for the result and "for delivering the change we promised".

He added: "The Labour Party has a process for challenging a leader and that has not been triggered. The country expects us to get on with governing. That is what I am doing and what we must do as a Cabinet."

Any challenger would need the support of 81 MPs to launch a leadership bid, with health secretary Wes Streeting seen as a leading contender.

Hewson said: "Whilst Keir Starmer might still be residing at No 10 Downing Street, it's hard to ignore the implicit vacancy light that's glinting from one of the building's downstairs windows.

"Without a clear challenger to take over the job of PM there's plenty of opportunity for speculation about who might fancy the job and what policies they would pursue."

Axel Rudolph, chief technical analyst at IG, noted that the pound pulled back from a two-month high as UK political uncertainty regarding its prime minister and stalled US-Iran peace talks weighed on sentiment, while rising UK yields - "to multi-decade highs", as well as surging oil prices and expectations for Bank of England rate hikes added pressure.

Oil prices rose after hopes of an imminent end to the Iran war were hit by US president Donald Trump's rejection of Tehran's latest peace proposals.

Trump dismissed the proposals as "stupid" and said on Monday: "I would say the ceasefire is on massive life support, where the doctor walks in and says: 'Sir, your loved one has approximately a 1% chance of living.'"

German inflation confirmed at highest levels since early 2024

On the economic front, German inflation was confirmed at 2.9% in April, its highest rate since January 2024, driven by higher energy prices linked to Middle East supply disruptions.

Harmonised inflation stood at 2.8% year-on-year, while core inflation fell to its lowest level in nearly five years.

German investor sentiment improved slightly in May but remained negative.

The ZEW economic sentiment index rose to -10.2 from April's three-year low of -17.2, beating expectations for a fall to -19.8.

Inflation expectations moderated from April, although 71.7% of respondents still expected prices to rise over the next six months.

Investors also remained broadly positive on the DAX, with 36.2% expecting gains over the coming six months.

"Stock indices around the globe are under pressure as US inflation rises more than expected amid the Middle East oil shock," Rudolph said.

"Small business optimism stagnating in April doesn't lighten the mood amid investors either, nor does investor sentiment recovering in Germany from an over three-year low."

In the UK, retail sales fell sharply in April as the early timing of Easter and weaker consumer confidence weighed on spending.

The BRC-KPMG retail sales monitor showed total sales down 3% year-on-year, compared with a 12-month average increase of 1.8%.

Food sales fell 2.5%, while non-food sales declined 3.3%.

Helen Dickinson, chief executive of the British Retail Consortium, said the Easter shift had hit sales but added that fears about the Middle East conflict driving up living costs had also led shoppers to rein in spending.

EY meanwhile cut its UK growth forecast for 2026 to 0.8% from a previous estimate of 1.3%, citing disruption to global energy supplies and higher inflation caused by the Middle East conflict.

The consultancy expected inflation to rise above 4% by the end of the year and said growth could slow to just 0.3% if the Strait of Hormuz remains closed until the end of 2026.

Anna Anthony, EY's regional managing partner for the UK and Ireland, said businesses were dealing with "turbulent energy prices, supply chain disruption, inflation and elevated interest rates".

Hewson said elevated borrowing costs would leave policymakers with increasingly difficult choices.

"Borrowing more could help accelerate the change that the Labour government promised voters at the general election, but looking at today's gilt yields that borrowing is going to cost more than it would have even a couple of months ago."

In the US, consumer prices rose 0.6% in April, easing from March's 0.9% increase, according to the Bureau of Labor Statistics.

Energy prices rose 3.8% on the month and accounted for more than 40% of the overall rise, while shelter costs increased 0.6% and food prices rose 0.5%.

Annual headline inflation accelerated to 3.8% from 3.3%, while core CPI rose to 2.8% from 2.6%.

"US inflation is not immune to higher energy prices with CPI hitting its highest level in three years, pushing stocks down," Rudolph said.

Greggs and Bayer in the green, Vodafone slides

Among equities, Greggs rose 5.45% after the UK bakery chain issued an upbeat trading update, while Bayer gained 3.67% after results.

Vodafone fell 7.85% despite swinging to an operating profit of €2.8bn from a €0.4bn loss a year earlier, ahead of analyst expectations for around €2.1bn.

Full-year revenue rose 8% to €40.5bn, helped by strong service revenue and the consolidation of Three UK, but came in slightly below consensus expectations.

Reporting by Josh White for Sharecast.com.