Germany's main stock index fell on Thursday as the European Central Bank delivered its second interest-rate increase this year and crude-oil prices spiked on escalating Middle East tensions.
The DAX closed down 0.84% at 25,361.15 points near the session low. The MDax index of mid-cap stocks dropped 1.50% to 31,596.42. The EuroStoxx 50 fell 0.67% to 6,268.97. Outside the euro area, Britain's FTSE 100 and Switzerland's SMI retreated more modestly, while the US Dow Jones declined 0.5% by the time European markets closed.
The ECB raised its deposit-facility rate from 2.25% to 2.5% at a meeting held outside the bank's headquarters in Berlin, and simultaneously upgraded its inflation projections for the next two years. ECB officials said the rate lift was necessary to counter inflation fueled by the Iran conflict.
"The key interest rates must rise because inflation is proving more persistent than expected," wrote Ulrich Kater, chief economist at Deutsche Bank. "The ECB is in an unenviable position because higher rates burden an already weak economy," he added, noting that the fight against inflation weighs more heavily.
Kater said financial markets had priced in enduring inflation risks, pushing up all capital-market interest rates recently. Although rates may ease somewhat next year, they are unlikely to return to the levels seen in recent years.
Higher borrowing costs tend to pressure equity valuations by raising corporate financing expenses and reducing earnings, while also making bonds more attractive as alternatives.
Oil-market anxiety intensified after the Iran-supported Houthi militia captured the strategically vital port city of Mokha on Yemen's west coast, according to Yemeni military sources and eyewitness accounts. The advance brings the group closer to the Bab al-Mandab strait, one of the world's most critical maritime chokepoints.
Rising crude prices spurred fears of a economic slowdown, which in turn dragged on commodity-sensitive metals. Copper, silver, and platinum prices fell sharply on the commodities exchanges.
In Frankfurt, Aurubis, the copper giant, shed 5.3%. Steelmaker Salzgitter, which holds a stake in Aurubis, fell 7.3%. Bilfinger shares tumbled 7.5% at the bottom of the MDax; analyst Andreas Wolf at Berenberg Bank said the industrial-services company would need to make "noticeable strides" in profitability through the second half of the year to hit its annual targets. Hochtief, the DAX laggard, lost more than 6% on profit-taking but remains up over 21% year to date, benefiting from the artificial-intelligence-driven boom in data-center construction.
