Geopolitical tensions and economic uncertainties weigh on European markets

European equities closed down on Thursday as violence in the Middle East impacted on regional investor mood.

The Stoxx 600 finished 1% down, with losses across all sectors and major bourses. Construction and materials fell 2%, while oil and gas equities were the only ones to retain their gains, closing the day 0.3% ahead.

The ongoing geopolitical tensions in the Middle East have cast a shadow over global financial markets, with European investors particularly cautious. The escalating conflict has raised concerns about potential disruptions to oil supplies, leading to increased volatility in energy markets. This uncertainty has prompted many investors to adopt a risk-off approach, shifting their focus towards safe-haven assets such as gold and government bonds.

Auto stocks fell 2.17% on news that the European Union might impose tariffs of up to 45% on Chinese electric vehicle (EV) manufacturers as early as Friday — a move that European automakers have opposed. Stellantis and Volvo had 4% and more than 3% declines, respectively. Porsche and Renault also pulled back.

The potential tariffs on Chinese EVs have sparked a heated debate within the European automotive industry. While some argue that these measures are necessary to protect domestic manufacturers and maintain a level playing field, others fear that such protectionist policies could lead to retaliatory actions from China and ultimately harm European companies with significant investments in the Chinese market. The uncertainty surrounding this issue has contributed to the overall negative sentiment in the auto sector.

European equities finished neutral on Wednesday as investors reviewed the ongoing turmoil in the Middle East and fresh eurozone unemployment statistics, which showed unemployment in the eurozone remained stable at a record low 6.4% in August.

Israel bombarded central Beirut early Thursday, killing at least six people as it pursues the Iran-backed militant organization Hezbollah. Israel initiated ground incursions into Lebanon on Tuesday, and the assault on Beirut earlier today came after Iran launched over 180 ballistic missiles toward Israel earlier this week. According to Israeli sources, the operation resulted in no injuries and the majority of the missiles were intercepted.

The escalation of hostilities between Israel and Hezbollah has raised fears of a wider regional conflict, with potential implications for global energy markets and economic stability. Analysts are closely monitoring the situation, as any further escalation could lead to significant disruptions in oil production and transportation, potentially triggering a surge in global energy prices. This uncertainty has contributed to the cautious stance adopted by many European investors.

Overnight, Hong Kong stocks fell as the China stimulus rally, which began after officials unveiled a series of support measures last week, started to fade. Markets in mainland China are closed till October 8.

The waning enthusiasm for China's stimulus measures reflects growing concerns about the long-term effectiveness of these policies in addressing the country's economic challenges. Investors are increasingly skeptical about the ability of these measures to boost consumer spending and revive the struggling property sector. This sentiment has spilled over into European markets, particularly affecting companies with significant exposure to the Chinese economy.

Meanwhile, in the United States, markets fell Thursday as weekly initial unemployment claims came in slightly higher than predicted. The figures come ahead of the crucial September payrolls report, which is scheduled on Friday.

The higher-than-expected unemployment claims in the U.S. have added to the already cautious mood in European markets. Investors are now eagerly awaiting the September payrolls report, which could provide important insights into the health of the U.S. labor market and potentially influence the Federal Reserve's future monetary policy decisions. Any signs of weakness in the U.S. economy could have ripple effects on global markets, including European equities.