European Stocks Flat as Iran Tensions, ECB Rate Hike Loom

European stocks traded largely flat on Monday as escalating tensions in the Persian Gulf and expectations for an European Central Bank interest rate hike kept investors cautious.

The pan-European STOXX 600 slipped 0.1%, remaining near multi-week lows. Germany’s DAX and France’s CAC 40 also struggled for direction as markets weighed rising energy costs and tighter monetary policy.

Investor sentiment weakened after Iran signaled plans to establish a restricted zone outside the Strait of Hormuz. The move follows U.S. strikes that disabled three Iranian oil tankers over the weekend, which Washington said were retaliation for an Islamic Revolutionary Guard Corps ballistic missile attack targeting two U.S. Navy warships.

Oil prices climbed another 1% on Monday after surging nearly 10% last week, pushing Brent crude firmly above $90 per barrel. Any prolonged disruption around the Strait of Hormuz could threaten a major share of global seaborne oil and gas supplies, potentially increasing inflation and energy costs across Europe.

Investors are also preparing for Thursday’s ECB monetary policy decision. Money markets have largely priced in a 25-basis-point rate increase after preliminary data showed Eurozone inflation accelerated to 3.3% in August, driven partly by a 14.3% rise in energy prices.

Expectations for higher rates have kept European government bond yields elevated, including Germany’s 10-year Bund yield near multi-year highs. Higher borrowing costs are particularly challenging for rate-sensitive industries such as real estate, construction and growth stocks.

Attention will also turn to the upcoming U.S. Consumer Price Index report. The inflation data follows Friday’s stronger-than-expected U.S. jobs report, which showed the economy added 162,000 positions in August.

A hotter U.S. CPI reading could strengthen expectations that the Federal Reserve will raise interest rates at its September 15-16 meeting, adding further pressure to global equities. Softer inflation, however, could ease rate concerns and provide support for European stock markets.