European shares slip as US-Iran talks shows little progress

European equities experienced a decline on Thursday, erasing early gains as diplomatic talks between the United States and Iran showed little progress. The STOXX 600 index dropped 0.4%, with Germany's DAX and France's CAC 40 sinking 0.6% and 0.4% respectively. London's FTSE 100 also fell by 0.3%. The hopes for a swift diplomatic resolution at the United Nations General Assembly waned as U.S. and Iranian officials remained far apart on the terms of a formal peace agreement and the reopening of the Strait of Hormuz, reviving energy risk premia.

Growth sectors were hit hard after major tech companies expressed increasing unease over the risks and challenges associated with artificial intelligence deployment, monetization, and regulatory concerns. As Chinese President Xi Jinping and U.S. President Donald Trump were set to meet in Washington, investors maintained sizable cash reserves, watching closely for potential breakthroughs in trade relations and technology export policies.

The meeting between Trump and Xi, though anticipated to be modest, holds significant importance for the global economy, covering rare earth minerals, tariffs, AI, and the Middle East conflict. Analyst Lukman Otunuga of FXTM indicated that the summit could have far-reaching implications for the global economy. Meanwhile, French assets remained a key focus as markets awaited upcoming business climate and consumer confidence survey data, which are being released amidst a challenging fiscal environment.

The cost of insuring French government debt against default, through credit default swaps (CDS), has reached multi-year highs, resulting in French sovereign bonds being among the poorest performers in the euro area. This is primarily due to parliamentary deadlock hindering the progress toward structural budget consolidation. Meanwhile, U.S. Treasury yields reached multi-year highs overnight as traders priced in the likelihood of persistent central bank rate hikes, with money markets now forecasting a 70% chance of another rate increase next month, according to the CME FedWatch tool.

This surge in global risk-free rates continues to exert intense pressure on equity multiples, threatening the STOXX 600's multi-month winning streak. Meanwhile, heightened borrowing costs, volatile gas prices, and hawkish central bank guidance are further challenging investor confidence.