Eurozone PMI Contracts at Fastest Pace Since 2023 as CL=F Shock Hits ^FCHI and ^GDAXI

The Iran war, now three months in, is exacting a severe toll on eurozone growth and inflationThe rate at which prices rise across an economy. dynamics. Flash PMI data released this week showed that European business activity contracted at the fastest pace since early 2023, a sharp reversal from the tentative recovery of late 2025. Energy price shocks from disrupted Middle East supply are feeding through into both producer and consumer inflation, while uncertainty about the conflict's durationBond price sensitivity to interest rate changes. is causing firms and households to pull back on spending.

The European Commission lowered its growth forecasts for the eurozone and warned of the fastest inflationThe rate at which prices rise across an economy. since 2023, citing energy-cost pressures and war-related uncertainty. France saw business activity shrink at the quickest pace in five and a half years, undermining the government's plans to rein in the budget deficit ahead of next year's election. Germany's private-sector activity contracted for a second consecutive month, raising recession risks for Europe's largest economy. Meanwhile, Turkey liquidated almost all of its US Treasury holdings in March as it scrambled to defend its currency during the opening month of the war.

Bond markets have borne the brunt of the repricing. Yields on eurozone sovereigns have spiked, and the rout has spread globally: US 30-year Treasury yields hit their highest level since 2007, and the market has begun pricing in a non-trivial probability of Federal Reserve rate hikes in 2026. This repricing reflects a fundamental shift: central banks now face a dilemma. Supportive monetary policy could ease recession risks but stoke inflationThe rate at which prices rise across an economy.; tightening could cool inflation but risk tipping economies into contraction. The market is betting central banks will err on the side of caution and hold rates steady or cut modestly once inflation pressures ease.

For equities, the implications are mixed. Energy importers face margin compression as input costs rise. Utilities and defensive sectors are attracting capital as investors seek yield with lower durationBond price sensitivity to interest rate changes. risk. But the broader risk is that persistent stagflation, slow growth with sticky inflationThe rate at which prices rise across an economy., creates an environment where neither equities nor bonds offer compelling returns, forcing capital into cash and alternatives. Until energy prices moderate or the conflict resolves, eurozone equities will likely trade at a valuation discount to the US, where energy shocks are more muted and the consumer remains resilient.