European stock markets lost momentum on Thursday, with all major benchmark indices closing lower as investor optimism waned due to economic and geopolitical uncertainties. The defence-led rally faded, and German stocks bore the brunt of the downturn, with the DAX sliding 1.24%, led by sharp selloffs in industrial and automotive shares. Optimism over Germany’s fiscal reform also faded after EU leaders failed to present a concrete strategy to support Ukraine.

The pan-European Stoxx 600 Index declined by 0.43%, while France’s CAC 40 fell 0.95% and Spain’s IBEX 35 dropped 0.76%.

At a summit in Brussels on Thursday, the leaders of the 27 EU member states failed to reach an agreement on a €5 billion ammunition aid package for Kyiv, as France and Italy hesitated to commit to specific financial contributions. The bloc is also under pressure to assert its role to avoid being sidelined in the peace talks after US President Donald Trump brokered a 30-day ceasefire agreement on energy and infrastructure in Ukraine with the Kremlin and Kyiv.

A group of European nations, including Germany, Italy, and Poland will meet in Paris next week to further address their position in Ukraine peace talks, with the UK, Canada, and Ukraine also expected to attend.

ECB’s economic outlook spurs stagflation concerns

On the economic front, ECB President Christine Lagarde highlighted the negative implications of Trump’s tariffs and retaliatory measures. She reiterated a “data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance,” stressing that the ECB is “not pre-committing to a particular rate path”.

Lagarde stated that the US’ 25% tariff on the EU imports, along with countermeasures, is expected to slow the bloc’s growth by 0.5% while lifting inflation by the same percentage. Her comments, which echoed the Federal Reserve’s statement on Wednesday, heightened fears of global stagflation—a scenario of slowing economic growth coupled with elevating inflation—considered a bearish signal for equity markets.

Related

Defence and auto stocks retreat sharply

European defence stocks, which had recently reached record highs, fell sharply following the day’s events. The Euro Stoxx Aerospace & Defence Index declined 2%, with shares in German arms manufacturer Rheinmetall plunging as much as 12% before recovering to close 3.2% lower. The stock had already dropped 4.5% in the previous session after a strong rally since mid-February.