European shares drop as Middle East continues to hit sentiment

By Twesha Dikshit and Avinash P

May 4 (Reuters) - European shares dropped on Monday as hostilities in the Middle East showed no signs of easing and crude oil prices soared, with investors grappling with the prospects of successive interest rate hikes by the European Central Bank this year.

The pan-European STOXX 600 ended down 1% to 605.51 points, its biggest one-day fall in around a month.

Most sectors on the benchmark STOXX ended lower on a day when a South Korean ship was hit by an explosion in the Strait of Hormuz and Iranian drones caused a fire at a UAE oil port, as Tehran demonstrated its grip on Middle East oil.

The U.S. military said two U.S. merchant ships had made it through the strait, without saying when. Iran denied any crossings had taken place, and there was no indication that President Donald Trump's "Project Freedom" had led to a meaningful surge of shipping through the waterway.

"The European market is a lot more exposed to the impact of higher commodity prices than the U.S. economy is going to be... that's exerting a considerable amount of pressure and just giving investors a little bit of pause for thought", Michael Brown, senior research strategist at Pepperstone, said.

Worries that elevated crude oil prices on the back of the Iran war would stoke inflation worldwide have led to a sharp re-pricing of monetary policy, with traders now fully pricing in at least three 25-bps hikes by the European Central Bank this year, according to LSEG data.

Euro zone banks were hit hard on Monday, declining 2.7% to clock their biggest one-day fall in more than six weeks.

Automakers shed 2.1% after U.S. President Donald Trump said late on Friday he would raise tariffs on cars and trucks from the European Union to 25% this week, up from the previously agreed 15%.

European equities remain more than 4% away from their pre-war levels, as the region's energy dependence has reinforced inflation and growth concerns, while Wall Street and global equities have rebounded on artificial intelligence-driven optimism.

Among other movers, Thyssenkrupp fell 1.8%. The German industrial giant paused talks to sell its steel unit to India's Jindal Steel.

Umicore jumped 15.3% after the Belgian materials group lifted its full-year EBITDA guidance, while Czech firm CSG slid 13.1% after Hunterbrook Capital disclosed a short position on the ammunitions maker.

On the data front, German manufacturer sentiment turned negative in April for the first time since October 2024 and a separate reading showed investor morale in the euro zone improved slightly in May.

(Reporting by Twesha Dikshit and Avinash P; Editing by Nivedita Bhattacharjee, Janane Venkatraman and Andrew Heavens)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published May 4, 2026 at 12:45 PM.