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European stock markets hit a three-month low on Tuesday, driven by a broad-based selloff following Ukraine’s unprecedented strike on a Russian military base using US-made long-range missiles. Russia’s subsequent threat to lower the threshold for nuclear weapon use added to market jitters.

The Euro-Pan Stoxx 600 index dropped 1% early in the session, hitting levels last seen on 8 August, before trimming losses to close 0.45% lower. Leading indices mirrored this decline, with Germany’s DAX and France’s CAC 40 both falling 0.67%, while Spain’s IBEX 35 slipped 0.74%.

Energy Prices Surge Amid Supply Disruption Fears

Energy markets reacted sharply to fears that Ukraine might target Russia’s oil and gas infrastructure, potentially disrupting global supply. Brent and WTI crude oil prices both spiked 3%, while natural gas futures surged 3.8%, reaching a one-year high before paring some gains.

Michael McCarthy, Chief Market Strategist at Moomoo, predicted further volatility: “Think resolution is coming, but the situation is likely to deteriorate first. Oil and gas prices are likely vulnerable to spikes over the coming weeks.”

Haven Assets Gain as Investors Flee to Safety

Geopolitical uncertainties spurred demand for safe-haven assets. Gold futures on COMEX rose 0.63% on Tuesday, extending their rally into the Asian session and reaching $2,644 per ounce – a one-week high – by 3:45 am CET.

Similarly, German 10-year government bond prices rose sharply, with yields dropping by 10 basis points to their lowest in nearly a month before rebounding slightly.

Senior market analyst Kyle Rodd of Compital.com observed: “Whatever the case, any escalation will be positive for energy and negative for European stocks. That’s likely to remain the case until ther’’s a meaningful de-escalation in the war.”

Banking and Consumer Sectors Underperform

The banking sector bore the brunt of the sell-off, as fears of an all-out war raised concerns about Europe’s public finances. The Stoxx Euro 600 banking index fell 1.4%, with UniCredit shares plunging 5% intraday before recovering to close 2.3% lower. Banco Santander and BNP Paribas also posted losses of 1.57% and 1.84%, respectively.

Consumer stocks were similarly affected, with LVMH and Nestlé each falling 1.9%, and L’Oréal down 0.9%. Worries about a potential escalation in the Ukraine-Russia conflict impacting China – Europe’s largest market for luxury goods – added to the sector’s woes.

European Defence Stocks Rally

In contrast to the broader sell-off, European defence stocks surged as geopolitical tensions heightened. Shares of Rheinmetall AG and SAAB AB rose more than 3%, while Thales gained 1.68%.

Defence stocks have been buoyed by Donald Trump’s US election victory, with the STOXX Europe Aerospace & Defence index climbing 4.3% in November. Concerns over reduced US funding for Ukraine have prompted expectations of increased European defence spending.

Rheinmetall AG, Germany’s leading ammunition manufacturer, has seen its stock rise 30% since the US election day, marking a 109% rally year-to-date. At its Capital Markets Day presentation, the company outlined ambitious growth plans, aiming for €20bn in sales by 2027.

Euro Faces Pressure

The euro initially fell sharply against the US dollar but managed to end flat on Tuesday. As of Wednesday’s Asian session, the EUR/USD pair was trading at 1.0590, with risk-off sentiment continuing to weigh on the single currency.

The yield spread between US and German 10-year government bonds widened to its highest level since April, making the US dollar more attractive than the euro. Analysts warn that the euro could fall to parity with the dollar if geopolitical tensions persist alongside Trump’s return to the White House.