European stocks finish lower as oil rises and investors bet on rate hikes

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View along Threadneedle Street towards the Bank of England in the City of London on 25th February 2026 in London, United Kingdom. The Bank of England is the central bank of the UK and is responsible for setting interest rates.

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The bounce back in European stocks was short-lived on Friday, as oil prices rose and investors weighed the cautious tone struck by central banks across the continent in the previous session.

The pan-European Stoxx 600 closed 1.7% lower, wiping out its morning advance. All major regional bourses ended the sessionin negative territory.

Friday morning had brought a brief reprieve to markets after regional stocks closed sharply lower on Thursday, as further escalation in the U.S.-Iran war raised concerns that an energy shock could put inflationary pressure on the global economy. Oil prices earlier this week briefly touched $119 a barrel, fueling a risk-off sentiment. This led to another sell-off across most asset classes on Friday.

In corporate news, British engineering firm Smiths Group’s shares ended the day down 9.9% after missing half-year revenue growth ‌estimates on Friday. The firm’s CEO also announced plans to return another £1.5 billion to shareholders by 2027 with an additional share buyback program.

Oil prices continued to climb, despite U.S. Treasury Secretary Scott Bessent saying Washington may lift sanctions on Iranian crude stored aboard tankers in a bid to cool energy costs.

International benchmark Brent crude futures with May delivery were last seen 1.1% higher at $109.81 per barrel, while U.S. West Texas Intermediate futures with April delivery eked out gains of 3.3% to $99.30.

Central banks hold rates

Yields on U.K. gilts continued to push higher on Friday as fears of an energy-driven inflation shock weighed on the outlook for borrowing costs. Yields on 2-year gilts, which are more sensitive to the Bank of England’s interest rate policies, rose nearly 18 basis points to 4.582%. Yields on 10-year gilts, the benchmark for Britain’s government debt, hit their highest level since the 2008 Global Financial Crisis, at 4.995%, rising almost 15 basis points on the day.

The surge came as new Office for National Statistics data showed U.K. public sector borrowing totaled £14.3 billion ($19.1 billion) in February, an unexpected jump of £2.2 billion year-on-year.

The Bank of England’s Monetary Policy Committee voted unanimously to keep rates on hold on Thursday, with policymakers saying they were “ready to act” to offset the effects of the war – again prompting an increase in bets on rate hikes later this year.

Other central banks across Europe held interest rates steady this week, citing the Iran war as a new source of uncertainty for the inflation outlook.

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The European Central Bank said the conflict had created “upside risks for inflation and downside risks for economic growth,” prompting traders to up bets on potential ECB rate hikes later this year.

But ECB policymakers noted that uncertainty hung over the longer-term impact of the war, with its influence on inflation depending on both the duration of the conflict and the impact of energy volatility on consumer prices and the economy.

Investors are now currently pricing in more than a 50% chance of a rate hike at the ECB’s next meeting in April.

Traders are pricing in a 100% chance of a rate hike from the Bank of England by June, according to LSEG data. The chance of a cut this year, according to markets, is now zero.

Both the Swiss National Bank and Sweden’s Riksbank also held rates steady, citing uncertainty around the war in the Middle East. The decisions followed a hold from the U.S. Federal Reserve on Wednesday, which also took a cautious approach amid the escalating conflict.

In corporate news, consumer goods giant Unilever confirmed on Friday it was in talks about selling its foods business, which includes Hellman’s Mayonnaise and Horlicks, to U.S. firm McCormick & Company. Last year, Unilever spun off its Magnum ice cream division into a separate company that is now listed in Amsterdam.

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British pub chain J D Wetherspoon said in an interim trading report on Friday that rising employment and energy costs, as well as “considerable pressure on consumer finances,” may result in profits below consensus estimates this year.

Meanwhile, news agency Reuters reported on Friday that Thyssenkrupp’s Deputy Chairman Juergen ⁠Kerner said talks to sell the company’s steel unit to India’s Jindal Steel were “not moving forward.”

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