Oil-Driven Inflation Concerns Weigh on European Stocks

European stocks experienced a cautious session on Tuesday due to escalating tensions in the Middle East and rising oil prices, which kept investors on edge. The pan-European STOXX 600 was down 0.05% at 649.6. However, energy shares gained 0.6% as oil hovered around $98 a barrel following Yemen's Iran-aligned Houthi forces' attack on Saudi Arabia's energy facilities and cities.

Novartis took the biggest hit on the STOXX 600, plummeting 10.9%, after reporting that its experimental treatment for a muscle-wasting disorder had failed in a late-stage trial. The company also disclosed the failure of an experimental cholesterol drug in a closely watched late-stage study just a day prior.

The mining sector saw gains, with prices climbing and stocks like Rio Tinto, BHP Group, and Anglo American rising between 4.6% and 6.3%. The broader European mining index jumped 2%. In the economic front, German exports unexpectedly fell in July, highlighting the fragility of Europe's largest economy.

Elevated oil prices have revived inflation concerns, contributing to a global bond selloff and strengthening expectations that central banks may need to keep monetary policy restrictive for longer. Investors widely expect the European Central Bank to raise interest rates by 25 basis points on Thursday, with markets pricing in another increase by year-end and one more in 2027.

ING analysts noted that any further rate hikes beyond September would move policy from 'insurance' into 'restrictive' territory, which still lacks sufficient support from the data. Markets may also be underestimating concerns about overtightening and its potential spillover into European bond markets.