European markets close lower as investors eye Middle East tensions; oil prices jump 4%

LONDON — European stocks closed lower Tuesday, erasing earlier gains amid heightened fears of a possible attack by Iran on Israel.

The pan-European Stoxx 600 provisionally ended down around 0.4%, with most sectors in negative territory. Europe's banking index led the losses, down 2.2%.

European markets

European stocks turned lower during afternoon trade following reports the U.S. had seen indications that Iran is preparing to launch an imminent ballistic missile attack on Israel, one senior White House official told NBC News on Tuesday.

Oil prices jumped more than 4% on the news. International benchmark Brent crude futures with December expiry were last seen 4.2% higher at $74.73 per barrel, while U.S. West Texas Intermediate futures rose 4.5% to trade at $71.22.

Reports of a potential attack by Iran came as Israeli ground forces launched a ground incursion into Lebanese territory. Israel last week killed Hezbollah chief Hassan Nasrallah in a bombing in Beirut, Lebanon. Hezbollah is an Iran-backed militant group.

Euro zone inflation falls below ECB target

On the data front, euro zone inflation fell below 2% for the first time since mid-2021, preliminary data showed Tuesday, likely boosting the chances of another interest rate cut from the European Central Bank.

Inflation for the 20-country bloc fell to 1.8% in September, less than the 1.9% forecast by economists and below the 2.2% recorded in August, according to Eurostat.

Matthew Ryan, head of market strategy at financial services firm Ebury, said the print had effectively "sealed the deal" for a second consecutive 25 basis points cut when the ECB meets later this month.

"While President Lagarde indicated to markets at the last meeting that an October cut was not in the bank's baseline scenario, we think that macroeconomic data since then is highly likely to force the bank's hand," he said in a note, adding that an additional cut could be expected in December.

The regional reading comes after preliminary harmonized German inflation data released on Monday showed the country's consumer price index eased to 1.8% in September, down from 2% in August. The reading had been forecast to come in at 1.9%, according to a Reuters poll of economists.

Last week, preliminary data showed the harmonized inflation rate in both France and Spain also plunged below the ECB's 2% target in September.

Stocks on the move

Looking at individual stock moves, shares of German chemicals group Covestro rose 3.8% after Abu Dhabi's national oil company Adnoc agreed to acquire it for 14.7 billion euros ($16.3 billion).

Meanwhile, British bakery chain Greggs fell 5.2%, as sales growth showed signs of cooling.

Renault shares fell 3%, extending auto sector losses recorded in the previous session amid growing industry pressures and heightened competition from China.

The wobbly start to October comes after European stocks closed lower in the previous session.

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U.S. stocks were lower on Tuesday as markets closely monitored the escalating situation in the Middle East.

Investors also digested comments by Federal Reserve Chair Jerome Powell who said on Monday that the central bank is "not on any preset course" when it comes to the next steps for rate policy. He said to expect two more cuts this year — that is, a quarter percentage point each — if the economy performs as anticipated.

Asia-Pacific markets closed mixed on Tuesday with South Korea, Hong Kong and mainland China markets closed for a public holiday. Mainland China will be closed for the rest of the week for the Golden Week holiday.