European shares retreat as Middle East tensions flare

European shares dropped on Friday, with an escalation in U.S. and Iran ‌fighting sending oil prices higher and dampening hopes that a diplomatic solution could be close.

U.S. President Donald Trump said the ceasefire was still in effect despite ‌forces clashing in the Gulf, with Washington awaiting a response from ‌Tehran to its proposal to end the conflict. The pan-European STOXX 600 fell 0.8% to 611.69 points as of 0703 GMT. Major regional markets mirrored the move, with Germany's ⁠DAX and ​London's FTSE ⁠100 down 0.9% and 0.5%, respectively.

European equities have remained sensitive to geopolitical headlines, with the ⁠region's energy dependence weighing on markets and raising concerns over the impact on ​inflation and growth. Financial markets currently price in three or more rate hikes ⁠from the European Central Bank over the next 12 months. Also weighing on sentiment ⁠was ​Trump's threat that the European Union would face 'much higher' tariffs if trade deal commitments weren't implemented by July 4.

Among early movers, ⁠British Airways owner IAG tumbled 5.2% after forecasting lower annual profit than originally anticipated ⁠due to ⁠soaring jet fuel costs. Spanish travel technology company Amadeus rose 3.7% after reporting quarterly core earnings above market expectations and ‌maintaining ‌its guidance.

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