UPDATE 2-European shares slide as Middle East tensions flare

European shares slipped on ‌Friday ​in broad-based losses as a flare-up in the Middle East conflict hit risk sentiment at the end of a week dominated by geopolitics. The pan-European STOXX 600 closed down 0.7% at 612.14 ‌points, though it posted a second straight weekly gain, albeit small. Major regional markets followed suit, with Germany's DAX falling 1.3% to lead declines.

Washington said it expected an Iranian response as soon as Friday to its latest proposal to end the Gulf conflict, ‌even as U.S. and Iranian forces clashed and the United Arab Emirates came under renewed attack. "Investors somehow understand that the process ‌of getting to a peace agreement will not be nice, clean, and linear and that there will be setbacks and disagreements along the way," said Richard Flax, chief investment officer at Moneyfarm.

European stocks have remained sensitive to geopolitical headlines, with the region's energy dependence fuelling concerns about inflation and growth. Also weighing on ⁠sentiment was ​U.S. President Donald Trump's warning that ⁠the European Union would face "much higher" tariffs if trade commitments were not met by July 4.

Most STOXX sub-sectors declined, with financials and industrials the biggest ⁠drags, down 0.7% and 1.5%, respectively. Rheinmetall tumbled 9.2% after JPMorgan downgraded the defence group to "neutral" from "overweight". Its results this week showed first-quarter revenue below analysts' expectations. ​The defence sector declined 3.6%.

British Airways owner IAG shed 2.8% after forecasting lower annual profit than expected due to ⁠soaring jet fuel costs. The travel index fell 1.4%. Commerzbank said it plans to cut 3,000 jobs as it targets higher profits while fending off a takeover ⁠by ​Italy's UniCredit. The stocks closed down 3.9% and 1.3%, respectively.

Amadeus rose 1.9% after the Spanish travel technology company reported quarterly core earnings above market expectations and maintained its guidance. Meanwhile, European Central Bank President Christine Lagarde said the central bank is well placed ⁠to react to any rise in inflation, while Executive Board member Isabel Schnabel warned of increasing inflation risks linked to the Iran ⁠war.

Markets are pricing in two ⁠or more ECB rate hikes this year. In the U.S., employment increased more than expected in April, pointing to a resilient labour market and reinforcing expectations that the Federal Reserve will keep ‌rates unchanged for some ‌time.

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